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Identify for Each Transaction Which Effect Would Most Likely Occur

Question 109

Matching

identify for each transaction which effect would most likely occur as a result of the transaction

Premises:

Responses:

A passive investment in equity securities are purchased for $1,000 cash.

Increase in current ratio and earnings per share

The securities that cost $1,000 have a yearend market value of $800.

Decreases current ratio; increases earnings per share

The securities that cost $1,000 have a yearend market value of $1,200.

Increases current ratio; does NOT change earnings per share

The securities that cost $1,000 and have a current balance sheet value of $800 are sold for $900.

Decrease in current ratio and earnings per share

Decreases current ratio; does NOT change earnings per share

Does not change the current ratio or earnings per share

Can’t determine the direction of changes in the current ratio

Premises:

A passive investment in equity securities are purchased for $1,000 cash.

The securities that cost $1,000 have a yearend market value of $800.

The securities that cost $1,000 have a yearend market value of $1,200.

The securities that cost $1,000 and have a current balance sheet value of $800 are sold for $900.

Responses:

Increase in current ratio and earnings per share

Decreases current ratio; increases earnings per share

Increases current ratio; does NOT change earnings per share

Decrease in current ratio and earnings per share

Decreases current ratio; does NOT change earnings per share

Does not change the current ratio or earnings per share

Can’t determine the direction of changes in the current ratio

Correct Answer:

Premises:

Responses:

Increase in current ratio and earnings per share

Decreases current ratio; increases earnings per share

Increases current ratio; does NOT change earnings per share

Decrease in current ratio and earnings per share

Decreases current ratio; does NOT change earnings per share

Does not change the current ratio or earnings per share

Can’t determine the direction of changes in the current ratio

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