Question

In the right-hand column below, certain financial ratios are listed. To the left of each ratio is a business transaction or event relating to the operating activities of Delta Company (each transaction should be considered independently).

Required:

Indicate the effect that each business transaction or event would have on the ratio listed opposite to it. State the effect in terms of increase, decrease, or no effect on the ratio involved. In all cases, assume that the current assets exceed the current liabilities both before and after the event or transaction.

Business Transaction or Event Ratio Effect on Ratio 1. Declared a cash dividend. Current ratio 2. Sold inventory on account at cost. Acid-test ratio 3. Issued bonds with an interest rate of 8%. The company’s return on assets is 10%. Return on equity 4. Net income decreased by 10% between last year and this year. Long-term debt remained unchanged. Times interest earned 5. Paid a previously declared cash dividend. Current ratio 6. The market price of the company’s common stock dropped from $24.50 to $20.00. The dividend paid per share remained unchanged. Dividend payout ratio 7. Obsolete inventory totaling $100,000 was written off as a loss. Inventory turnover ratio 8. Sold inventory for cash at a profit. Debt-to-equity ratio 9. Changed customer credit terms from 2/10, n/30 to 2/15, n/30 to comply with a change in industry practice. Accounts receivable turnover ratio 10. Issued a stock dividend to common stockholders. Book value per share 11. The market price of the company’s common stock increased from $24.50 to $30.00. Book value per share 12. Paid $40,000 on accounts payable. Working capital 13. Issued a stock dividend to common stockholders. Earnings per share 14. Paid accounts payable. Debt-to-equity ratio 15. Purchased inventory on account. Acid-test ratio 16. Wrote off an uncollectible account against the Allowance for Bad Debts. Current ratio 17. The market price of the company’s common stock increased from $24.50 to $30.00. Earnings per share remained unchanged. Price-earnings ratio 18. The market price of the company’s common stock increased from $24.50 to $30.00. The dividend paid per share remained unchanged. Dividend yield ratio

Answer 1