Transaction Effects on Financial Ratios
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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 + 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. Split the common stock 2 for 1. Book value per share of common stock
b. Collected accounts receivable. Number of days' sales in accounts receivable
c. Issued common stock for cash. Total asset turnover
d. Sold treasury stock. Return on equity
e. Accrued interest on a note receivable. Current ratio
f. Sold inventory on account. Acid-test ratio
g. Wrote off an uncollectible account. Accounts receivable turnover
h. Declared a cash dividend. Dividend yield
i. Incurred operating expenses. Margin
j. Sold equipment at a loss. Earnings per share
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Solution Summary
This solution discusses the effect of certain transactions on various financial ratios.
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a. Split the common stock 2 for 1. Book value per share of common stock
NEGATIVE - The denominator increases
b. Collected accounts receivable. Number of days' sales in accounts receivable
NEGATIVE - Decrease in Accounts receivable ...
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