Required: Following is a list of paired ratios and transactions. For each transaction, indicate the effect...
Required:
Following is a list of paired ratios and transactions. For each transaction, indicate the effect of that transaction on the specific ratio. Use + for increase, - for decrease, and 0 for no effect.
Transaction Ratio
| ____a. | A firm is required to capitalize leases previously presented only in notes | Debt Ratio of 0.4 |
| ____b. | A firm sells its own common stock | Debt/Equity Ratio of 1.12 |
| ____c. | A firm has an increase in selling expense with no change in other expenses | Times Interest Earned Ratio of 6.2 to 1 |
| ____d. | A firm writes off a sizeable account receivable | Times Interest Earned Ratio of 3.6 to 1 |
| ____e. | A firm pays cash for a valuable patent | Debt to Tangible Net Worth Ratio of 1.3 to 1 |
Homework Answers
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| Transaction | Ratio | Effect | Reason |
| A firm is required to capitalize leases previously presented only in notes. | Debt Ratio of 0.4 | Debt Ratio will increase. | Both Assets and lease liability will increase. Equity will be same. Increase in lease liability will increase debt. So ratio will increase. |
| A firm sells its own common stock. | Debt/Equity Ratio of 1.12 | Debt Ratio will decrease. | Equity will be increase but debt will remain same. So ratio will decrease. |
| A firm has an increase in selling expense with no change in other expenses. | Times Interest Earned Ratio of 6.2 to 1 | Ratio will decrease. | Increase in selling expense will decrease operating income. |
| A firm writes off a sizeable account receivable. | Times Interest Earned Ratio of 3.6 to 1 | Ratio will decrease. | Writing off an account will create Bad Debt. bad debt will reduce operating income. |
| A firm pays cash for a valuable patent. | Debt to Tangible Net Worth Ratio of 1.3 to 1 | No change. | The transaction will not affect debt or Tangible assets in any way. |
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acquire plant assets Return on total assets Declared a stock
dividend on common shares Earnings per share Paid a current
creditor in full Acid‐test ratio Required: For each transaction
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Gross profit margin
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Times interest earned (TIE)
Debt ratio
Return on equity (ROE)
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