Homework Answers
Answer:
Current ratio = Current Liabilities / Current Assets
Inventory Turnover Ratio = COGS / Average Inventory
Total debt to total Assets = Total debts / Total Assets
Taken into account above formulae, each transaction can be separately analysed as below:
1) the company has declared the dividend but not yet paid, which would increase its current liabilities, in turn this transaction would lead to decrease in the current ratio. Due to increase in liabilities, company's debt to asset ratio will also increase, whereas this transaction wont have any impact on Inventory Turnover ratio.
2) Initially this transaction had lead to increase in Accounts receivables. At the time of return of goods for which payment has not been made, Accounts receivable would be higher than the cost of inventory as profit was included in the same. Therefore, decrease in current assets would lead to decrease in current ratio.
Due to increase in inventory & reduction in COGS, Inventory turnover ratio will also reduce. Since there is reduction in current assets, it would decrease debt to assets ratio.
3) This transaction would decrease the current liabilities. Therefore, in this transaction, current ratio will increase & debt to asset ratio will decrease having no impact over inventory turnover ratio.
4) Increase in accounts receivable will increase the current ratio reducing debt to asset ratio, whereas this asset does not impact Inventory or COGS, hence Inventory Turnover ratio will remain same.
5) Increase in selling price would increase the cash or accounts receivable balance due to which current ratio will increase as the current assets have increased. Having no effect on inventory or COGS, Inventory Turnover Ratio will remain same. Increase in assets of the company will lead to decrease in total debts to total assets ratio.
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