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E11.8 Effect of transactions on various financial ratios

E11.8
Effect of transactions on various financial ratios Indicate the effect that each transaction/event listed here will have on the financial ratio listed opposite it, and provide an explanation for your answer. Use 1 for increase, − for decrease, and (NE) for no effect. Assume that current assets exceed current liabilities in all cases, both before and after the transaction/event.
Transaction/Event Financial Ratio
a. Purchased inventory on account. Number of days' sales in inventory
b. Sold inventory for cash, at a profit. Inventory turnover
c. Issued a 10% stock dividend. Earnings per share
d. Issued common stock for cash. Debt ratio
e. Sold land at a gain. Return on investment
f. Purchased treasury stock for cash. Debt/equity ratio
g. Accrued interest on a note payable. Times interest earned
h. Accrued wages that have been earned by employees. Current ratio
i. Purchased equipment for cash. Plant and equipment turnover
j. Issued bonds at an interest rate that is less than Return on equity
the company's ROI.

Solution Preview

a. More inventory will make the days in inventory get higher . Enlarging the denominator decreases the turns and increases the days. (Note: turns and days move in opposite directions. 12 turns = monthly. 6 turns = every other month. So fewer turns is more days.
b. This is the opposite of ...

Solution Summary

A sentence or two explains each effect on the ratios.

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