Question

(Transaction effects on ratios) Two lists follow: one for ratios (including the ratio prior to the...

(Transaction effects on ratios)
Two lists follow: one for ratios (including the ratio prior to the transactions) and another for transactions.

Ratios:
      1. Current ratio, 1.9:1
      2. Quick ratio, 0.8:1
      3. Accounts receivable turnover, 10.6 times
      4. Inventory turnover, 7.8 times
      5. Return on assets, 12%
      6. Profit margin, 10.4%
Transactions:
      a. Goods costing $360,000 are sold to customers for $480,000 in cash.
      b. Accounts receivable of $130,000 are collected.
      c. Inventory costing $80,000 is purchased from suppliers on credit.
      d. A short-term bank loan for $50,000 is repaid to the bank.
      e. The company incurs a long-term bank loan of $150,000 to purchase equipment.
      f. The company incurs an account payable of $40,000 for operating expenses.
      g. The company pays a cash dividend of $200,000.


State the immediate effect (increase, decrease, or no effect) of each transaction on each ratio.

1 2 3 4 5 6
Ratio/
Transaction		 Current ratio
of 1.9 to 1		 Quick ratio
of 0.8 to 1		 A/R turnover
of 10.6 times		 Inventory turnover
of 7.8 times		 ROA of
12%		 Profit Margin
of 10.4%
a.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
b.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
c.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
d.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
e.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
f.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
g.

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect

DecreaseIncreaseNo Effect
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(Transaction effects on ratios)
Transaction Current Ratio Quick Ratio Accounts Receivable Turnover Inventory Turnover Return on Assets Profit margin
a. Increase Increase Increase Increase Increase Increase
b. No effect No effect Increase No effect No effect No effect
c. No effect No effect No effect Decrease Decrease No effect
d. No effect No effect No effect No effect Increase No effect
e. No effect No effect No effect No effect Decrease No effect
f. Decrease Decrease No effect No effect Decrease Decrease
g. Decrease Decrease No effect No effect No effect No effect
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