Ratios: The effects of transactions on ratios.
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I need to know the effect that each transaction will have on the financial ratio listed opposite it. Please use + for increase, - for decrease, and NE for no effect. Also, please give a short explanation for each answer. Assume that current assets exceed current liabilities in all cases, both before and after the transaction. Here is an example: Transaction: Sold Treasury Stock, Financial ratio: Return on equity, Effect: -(decrease), Explanation: Increases average owners' equity with no affect on net income.
Transation/Event Financial Ratio Effect (+/-/NE)
Purchased Inventory on account Number of days' sales in inventory
Sold inventory for cash, at a profit Inventory turnover
Issued a 10% stock dividend Earnings per share
Issued common stock for cash Debt ratio
Sold land at a gain Return on Investment
Purchased Treasury Stock for cash Debt/equity ratio
Accrued interest on a note payable Times interest earned
Accrued wages that have been earned by employees Current ratio
Purchased equipment for cash Plant and equipment turnover
Issued bonds at a interest rate that is less than the company's ROI Return on Equity
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Solution Summary
The solution provides an analysis of how different transactions affect the financial ratios.
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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