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

question 95

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 improve 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 transactions would have no effect on the firms' financial strength as measured by their current ratios.
• D) The transactions would lower both firms' financial strength as measured by their current ratios.
• E) The transactions would improve both firms' financial strength as measured by their current ratios.

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Definitions:

Non-Controlling Interest

The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company, reflecting the minority shareholder's stake in the subsidiary’s net assets.

Entity Method

A valuation approach in business combination accounting that views the acquiring and target company as a single entity from the date of acquisition.

Non-Controlling Interest

The portion of equity interest in a subsidiary not attributable to the parent company, reflecting the minority shareholders' stake.

Net Identifiable Assets

The aggregate of all assets acquired from a company, minus liabilities assumed, that can be assigned a fair value during a merger or acquisition.