The following question relates to PQR, which has the following ratios: return on assets, (ROA) 12 per cent; return on equity (ROE) 14 per cent; and current ratio (CR) of 1.8:1. The company purchased raw materials on credit for $400 000. This transaction will:
A) decrease ROA, ROE and CR.
B) decrease ROA and CR, but not ROE.
C) decrease ROA only.
D) have no effect.

Question

Quizplus · Accepted Answer

The purchase of raw materials on credit will decrease the current ratio because it increases the current liabilities. This will in turn decrease the ROA as well, since higher current liabilities means a lower net income for the same amount of revenue. However, it will not decrease the ROE as long as the company is able to generate a return on the investment made with the materials purchased on credit.

The Following Question Relates to PQR, Which Has the Following