Question

ndicate the effect that each transaction/event listed here will have on the financial ratio listed opposite it. 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	Effect
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 the company's ROI.	Return on equity

Answer 1

Transaction/ Event				Ratio			Effect on Ratio
a. Purchased inventory on account		Number of days sales in inventory	Decrease
b. Sold inventory for cash at a profit		Inventory turnover		Increase
c. Issued a 10% stock dividend			Earning per share		Decrease
d. Issued common stock for cash		Debt ratio		Decrease
e. Sold land at a gain				Return on Investment	Increase
f. Purchased Treasury stock in cash		Debt/ Equity ratio		Increase
g. Accrued interest on Notes payable		Times Interest earned	Decrease
h. Accrued wages that have been earned by employees	Current ratio		Decrease
i. Purchased Equipment for cash			Plant and Equipment Turnover	Decrease
j. Issued bonds at an interest rate that is less than ROI	Return on Equity		Increase