Safeco's Current Assets Total to $20 Million Versus $10 Million

question 101

Multiple Choice

Safeco's current assets total to $20 million versus $10 million of current liabilities, while Risco's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?

• A) The transactions would raise Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
• B) The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
• C) The transaction would lower both firms' financial strength as measured by their current ratios.
• D) The transaction would improve both firms' financial strength as measured by their current ratios.

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Definitions:

Deception

The act of misleading or concealing the truth to manipulate or cheat, which can be both socially and legally punishable.

Magnuson-Moss Act

A federal law enacted in 1975 aimed at improving consumer protections and warranties on household products and automobiles.

Manufacturing Equipment

Tools, machinery, and other durable equipment used in the production process of goods.

Federal Trade Commission

A U.S. federal agency established to prevent fraudulent, deceptive, and unfair business practices in the marketplace.