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For question 1, 2 and 3, Indicate whether each of the actions listed below will immediately...

For question 1, 2 and 3, Indicate whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratio shown. Assume each ratio is greater than 1.0 before the action is taken.

1. Purchase of inventory for cash - What is the effect on the Acid Test Ratio

2. Collection of an Accounts Receivable - What is the effect on Current Ratio

3. Payment for Advertising Expense - What is the effect on Total Debt to Equity Ratio

4. What does the debt to equity ratio tell you?

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Answer #1

1.Purchase of inventory for cash-D

The purchase of inventory for cash would reduce the acid test ratio.

2.Collection of an Accounts receivable-N

Collection of an accounts receivable has no effect on current ratio

3.Payment for advertising expense-N

Payment for advertising expense will have no effect on total debt to equity ratio

4.Debt to equity ratio is used for calaculation of a company's financial leverage.Under it the total liabilities of a company are divided by its shareholder's equiyy.It depicts the contribution made by shareholders or creditors to the capital of a company's business.It shows how much debt the company is using to carry out its business.

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