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

Question

Quizplus · Accepted Answer

Borrowing $10 million increases current liabilities for both firms. For Safeco, the current ratio decreases from 2:1 to 1.5:1, while for Risco, it increases from 0.5:1 to 1:1.

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