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In the Altman Z calculation   one of the ratios was retained earnings/total assets. What is the...

In the Altman Z calculation   one of the ratios was retained earnings/total assets. What is the impact on the numerical value of the ratio if

a)       Accounts receivable are collected?   Briefly explain.

b)       The firm operates at a profit but cuts to zero its dividend? Briefly explain.

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Answer #1
A) When accounts receivable are collected there is a decrease in Accounts receivable and
increase in Bank/Cash. Therefore, the net effect in the Asset side is NIL.
Also, this transaction does not affect Retained earnings.
Therefore, no change in the numberical value of the ratio.
B) Dividend is usually paid from Retained earnings. So by paying no dividend, the retained earnings
increase.
Also when dividend is paid out, the bank account balance decreases.
Therefore, there is an increase in the ratio by not paying the dividend.
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