Emerald Corporation's Current Ratio Is 0

question 71

Multiple Choice

Emerald Corporation's current ratio is 0.5, while Ruby (Emerald's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?

• A)The transactions will have no effect on the current ratios.
• B)The current ratios of both firms will be increased.
• C)The current ratios of both firms will be decreased.
• D)Only Emerald Corporation's current ratio will be increased.
• E)Only Ruby Company's current ratio will be increased.

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Definitions:

Quantitative Techniques

Mathematical or statistical methods applied for analyzing numerical data, often used in decision-making processes.

Cash Payback Technique

Identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.

Payback Method

A method used in capital budgeting to estimate the time required to recoup the initial investment from its cash flows.