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

question 18

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:

Current Liability

A company's debts or obligations that are due to be paid to creditors within one year.

Note Payable

An obligation in the form of a written promissory note requiring the borrower to repay the lender a specific sum of money on demand or at a predetermined date.

Interest Payable

This is the amount of interest expense that has accumulated but not yet been paid by a company.

Treasurer's Department

The treasurer's department is responsible for managing a company's financial assets, including cash flow, investments, and corporate financing.