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Determine the Immediate Effect of Each of the Transactions Described

Question 135

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Determine the immediate effect of each of the transactions described below on the ratio listed beside each transaction

Premises:
Return on ordinary shareholders’ equity (13%): Issued 10% bonds and invested the proceeds to earn 12%.
Return on total assets(13%): Issued 10% bonds and invested the proceeds to earn 12%
Accounts receivable turnover ratio (4 times): Shortened credit period from 60 days to 30 days and raised standards for accepting credit customers.
Earnings per ordinary share($6.25): Sold ordinary shares held in the treasury at a price above cost
Inventory turnover (4 times): Made large purchases increasing the average size of inventory.
Current ratio (2.1 to 1): Collected a large account receivable
Quick ratio: Wrte off an uncollectible account receivable against the allowance account.
Debt ratio: Declared a cash dividend, to be paid in three months
Responses:
I = increase the ratio
D = decrease the ratio
NE = no effect on this ratio

Correct Answer:

Return on ordinary shareholders’ equity (13%): Issued 10% bonds and invested the proceeds to earn 12%.
Return on total assets(13%): Issued 10% bonds and invested the proceeds to earn 12%
Accounts receivable turnover ratio (4 times): Shortened credit period from 60 days to 30 days and raised standards for accepting credit customers.
Earnings per ordinary share($6.25): Sold ordinary shares held in the treasury at a price above cost
Inventory turnover (4 times): Made large purchases increasing the average size of inventory.
Current ratio (2.1 to 1): Collected a large account receivable
Quick ratio: Wrte off an uncollectible account receivable against the allowance account.
Debt ratio: Declared a cash dividend, to be paid in three months
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