Question

Please answer within the hour


Deal ONLY with the facts provided in the scenario for all problems, and determine the direct effects of the scenario ONLY in the current period. Assume no effect on the market price of stock. Assume the Current Ratio prior to any scenario was 2:1.

1a. Determine the effect of the following scenario on the Current Ratio:

"A company pays a cash salary to one of its employees in the current accounting period for work performed in the current accounting period."

Current Ratio = Current Assets / Current Liabilities

The effect of this scenario DECREASES the ratio result.

The effect of this scenario INCREASES the ratio result.

The effect of this scenario DOES NOT AFFECT the ratio result.

1b. Determine the effect of the following scenario on the Cash Flows to Sales ratio:

"A company sells a piece of equipment (a long-term asset) in the current accounting period at a price higher than its net book value."

Cash Flows to Sales Ratio = Net Cash Flows from Operating Activities / Net Sales

The effect of this scenario INCREASES the ratio result.

The effect of this scenario DECREASES the ratio result.

The effect of this scenario DOES NOT AFFECT the ratio result.

1c. Determine the effect of the following scenario on the Return on Assets Ratio:

"A company declares dividends to common shareholders in the current accounting period but will pay the dividends to the shareholders in the next accounting period."

Return on Assets Ratio = Net Income / Average Total Assets

The effect of this scenario DOES NOT AFFECT the ratio result.

The effect of this scenario INCREASES the ratio result.

The effect of this scenario DECREASES the ratio result.

1d. Determine the effect of the following scenario on the Return on Equity Ratio:

"A company takes out a long-term loan from a bank near the end of the current accounting period. Interest will begin to accrue on this loan at the start of the next accounting period."

Return on Equity Ratio = Net Income / Average Stockholders' Equity

The effect of this scenario DECREASES the ratio result.

The effect of this scenario INCREASES the ratio result.

The effect of this scenario DOES NOT AFFECT the ratio result.

1e. Determine the effect of the following scenario on the Gross Margin ratio:

"A company begins contract negotiations in the middle of the current accounting period with a potential client. The contract being negotiated could yield the company up to several millions of dollars in service revenue."

Gross Margin Ratio = Gross Margin / Net Sales

The effect of this scenario DOES NOT AFFECT the ratio result.

The effect of this scenario INCREASES the ratio result.

The effect of this scenario DECREASES the ratio result.

Answer 1

Solution : -

1a. The effect of this scenario Decreases the ratio result.

As paying cash salary to employee will decrease current asset side of balance sheet which result in decrease in current ratio.

1b. The effect of this scenario Decreases the ratio result.

Sell of piece of equipment at a price higher than book value result in profit on sales of equipment which is to be credited to Income statment. While calculating Net cash flow from operating activites is to be deducted from Operating profit which result in decrease in cash flow to sale ratio.

1c.   The effect of this scenario Does not effect the ratio result.

1d.  The effect of this scenario Does not effect the ratio result.

1e.  The effect of this scenario Does not effect the ratio result.

As Contract only got negotiated and not turn to operational in the current period, So there is no effect on Gross margin.

Because interest on this Loan will accure from next accounting period.