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Accounting Problems

What are the effects of these transactions + increase, - decrease, and 0 no effect, assuming a Current Ratio of more than 1 to 1:

Total Effect

Current Current on Net

Assets Ratio Income

a. Cash is acquired through issuance of additional common stock.
b. Merchandise is sold for cash.
c. Federal income tax due for the previous year is paid.
d. A fixed asset is sold for less than book value.
e. A fixed asset is sold for more than book value.
f. Merchandise is sold on credit.
g. Payment is made to trade creditors for previous purchases.
h. A cash dividend is declared and paid.
i. Cash is obtained through short-term bank loans.
j. Short-term notes receivable are sold at a discount.

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What are the effects of these transactions + increase, - decrease, and 0 no effect, assuming a Current Ratio of more than 1 to 1:

Total Effect

Current Current on Net

Assets Ratio Income

First, we need to understand that current ratio is Current Assets/Current Liabilities. If Current Ratio is more than 1 to 1, it means Current Assets are higher than Current Liabilities.

a. Cash is acquired through issuance of additional common stock.

+ + 0

Cash is part of current assets. If cash is increased, then the current assets will increase. Thereby, current ratio will also increase. However, it will not effect on net income because cash is acquired from common stock.

b. Merchandise is sold for cash.

0 0 +

Cash and merchandise are both current assets. When merchandise is sold for cash, merchandise will decrease, but cash will also increase at the same amount. Therefore, there is no effect on both total current assets and to current ratio. For net income, as it is regarded as sales, it will increase the ...

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