Question

Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken. 1. Issuance of long-term bonds 2. Issuance of short-term notes 3. Payment of accounts payable 4. Purchase of inventory on account 5. Purchase of inventory for cash 6. Purchase of equipment with a 4-year note 7. Retirement bonds 8. Sale of common stock 9. Write-off of obsolete inventory 10. Purchase of short-term investment for cash 11. Decision to refinance on a long-term basis some currently maturing debt

Answer 1

Most managers make decisions based on the ratios that are calculated with the help of financial statements, which are prepared with the help of financial transactions. These ratios are calculated to find the financial condition of the company.

1) Issuance of long-term bonds - During the issuance of long term bonds, the current ratio increases, acid-test ratio also increases and debt-equity ratio also increases

2) Issuance of short-term notes - In this case, the Current ratio Increases, acid-test ratio also increases.

3) Payment of accounts payable - In this case, there is generally no change in the current ratio, while No change in the acid test ratio but the debt equity ratio increases

4) Purchase of inventory on account - When there is a purchase of inventory then, there is no change in the current ratio, while acid-test ratio decreases while the debt equity ratio Increases

5) Purchase of inventory for cash - When there is a purchase of inventory for cash then there is no change in the current ratio, while acid-test ratio decreases but the debt-equity ratio show no change

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