Question

A company sold inventory on credit. Its gross profit percentage is 23%. The effect of this...

A company sold inventory on credit. Its gross profit percentage is 23%. The effect of this transaction is that the

a.current ratio was unchanged.

b.debt-to-equity ratio increased.

c.working capital decreased.

d.earnings per share increased.

Business   Accounting   
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Homework Answers

Answer #1

· Correct Answer = Option ‘D’ Earnings per share increased,

· This is because, earnings per share = Net Income / Common shares outstanding.

· Selling of inventory on credit will:
Increase accounts receivables (current assets),
Decrease inventory (current assets)
Increase Sales revenue (revenue)
Increase Cost of Goods Sold (expenses).

· Since inventory is sold at a GP of 23%, the gross profits will increase by 23% of amount sold.
Increase in gross profits = increase in net income.

· Increase in net income will increase the earnings per share.

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