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Acctg7 Prob4

(Effects of Transactions on Various Financial Ratios) 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 Eclipse Company.

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Nyster Ann Rebenito
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273 views3 pages

Acctg7 Prob4

(Effects of Transactions on Various Financial Ratios) 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 Eclipse Company.

Uploaded by

Nyster Ann Rebenito
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem 4 (Effects of Transactions on Various Financial Ratios)

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 Eclipse Company.

1. Inventory was sold for cash at a profit. Debt-to-equity ratio

-Decrease Sale of inventory at a profit will be reflected in an increase in retained earnings,


which is part of shareholders’ equity. An increase in shareholders’ equity will in
a decrease in the ratio of assets or provided by creditors as compared to assets
provided by owners.

2. Land was purchased for cash. Earnings per share

-No Effect Purchasing land for cash has no effect on earnings or on the number of ordinary
shares outstanding. One asset is exchanged for another.

3. Inventory was sold on account at cost. Acid test ratio


-Increase A sale of inventory on account will increase the quick assets (cash, accounts
receivable, marketable securities) but have no effect on the current liabilities. For
this reason, the acid test ratio will Increase.

4. Some accounts payable were paid off. Working capital


-No effect Payments on account reduce cash and accounts payable by equal amounts; thus,
the net amount of working capital is not affected.

5. A customer paid an overdue bill. Average collection period


-Decrease When a customer pays a bill, the accounts receivable balance is reduced. This
increases the accounts receivable turnover, which in turn decreases the average
collection period.

6. A cash dividend was declared, but not yet paid. Current ratio
-Decrease Declaring a cash dividend will increase current liabilities, but have no effect on
current assets. Therefore, the current ratio will decrease.

7. A previously declared cash dividend was paid. Current ratio


-Increase Payment of a previously declared cash dividend will reduce both current assets
and current liabilities by the same amount. An equal reduction in both current
assets and current liabilities will always result in an increase in the current ratio,
so long as the current assets exceed the current liabilities.

8. The company’s ordinary share price increased. Book value per share
-No effect Book value per share is not affected by the current market price of the company’s
stock.

9. The company’s ordinary share price increased. Dividend yield ratio


Earnings per share remained unchanged.

-Decrease The dividend yield ratio is obtained by dividing the dividend per share by the
market price per share. If the dividend per share remains unchanged and the
market price goes up, then the yield will decrease.

10. Property was sold for a profit. Return on total assets


-Increase Selling property for a profit would increase net income and therefore the return
on total assets would increase.

11. Obsolete inventory was written off as a loss. Inventory turnover ratio
-Increase A write-off of inventory will reduce the inventory balance, thereby increasing the
turnover in relation to a given level of cost of goods sold.
12. Bonds were sold with an interest rate less than Return on ordinary
the company’s return on assets. shareholder’s equity
-Increase Since the company’s assets earn at a rate that is higher than the rate paid on the
bonds, leverage is positive, increasing the rate to the ordinary shareholders.

13. The company’s ordinary share price decreased. Dividend payout ratio
The dividend paid per share remained the same.

-No Effect Changes in the market price of stock have no direct effect on the cash dividends
paid or on the earnings per share and therefore have no effect on this ratio.

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