Lofland's Has $20 Million in Current Assets and $10 Million

question 79

Multiple Choice

Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland'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 each plans 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 transaction would improve both firms' financial strength as measured by their current ratios.
• B) The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio.
• C) The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio.
• D) The transaction would have no effect on the firm' financial strength as measured by their current ratios.
• E) The transaction would lower both firm' financial strength as measured by their current ratios.

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Definitions:

Automobile Tire

A rubber-based component fitted around the rim of a car wheel, providing traction and absorbing road shocks.

Concentration Ratios

Measures that indicate the extent of market control by leading firms in an industry, typically expressed as a percentage of total industry sales or output.

Imported Products

Goods or services brought into one country from another for sale, which can diversify consumer options and contribute to economic dynamics.

Interindustry Competition

The competition for sales between the products of one industry and the products of another industry.