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?

Question

Quizplus · Accepted Answer

The key here is to recognize that if the CR is less than 1.0, then a given increase to both current assets and current liabilities will increase the CR, while the reverse will hold if the initial CR is greater than 1.0.Thus, the transaction would make Smaland look stronger but Lofland look weaker.Here's an illustration:
 11ea1b84_8b7b_554b_a54a_d5af68d93e58_TB3581_00 
 11ea1b84_8b7b_554c_a54a_0d3d28b5aa4e_TB3581_00 All of the statements except c are incorrectrue.

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