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Effects of Transactions Upon Analytical Measurements

Question 122

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Effects of transactions upon analytical measurements
Determine the immediate effect of each of the transactions described below on the ratio listed beside each transaction. In the blank space to the left of each statement, you are to indicate the effect by writing the appropriate code letter. The code letters are as follows: I = increase the ratio, D = decrease the ratio, and NE = no effect on this ratio.

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

Correct Answer:

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