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 greater than 1.0 before the action is taken.

Note: Asumme each ratio is greater than 1.0, instead of less.

Acid-Test De bt to Current Equlty Ratio Ratio Action Ratio 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 of 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

Action	Currnet	Acid-test	Debt to Equity
	Ratio	Ratio	Ratio
1. Issuance of Long term bonds	(N)	(N)	(I)
2. Issuance of short-term notes	(D)	(D)	(N)
3. Payments of accounts payable	(I)	(I)	(N)
4. Purchase of inventory on account	(D)	(D)	(N)
5. Purchase of inventory on Cash	(D)	(D)	(N)
6. Purchase of equipment with a 4 year note	(N)	(N)	(I)
7. Retirment of Bonds	(N)	(N)	(D)
8. Sale of common stock	(N)	(N)	(I)
9. Written of Obselete Inventory	(N)	(N)	(N)
10. Purchase of Short-term Investments in cash	(N)	(N)	(N)
11. Decision to refinance on a long-term basis
some currently maturing debt	(I)	(I)	(I)
Explanation to the above answers:
1. Issuance of long term bonds is increasing the debt so thereby increase in Debt to equity ratio
2. Issuance of short term notes increase in current liabilities thereby decrease in current ratio and Acid test ratio
3. Payments of accounts payable is decrease in current liabilities thereby increase in current ration and Acid test ratio
4. Purchase of inventory on account is increase in current liabilities thereby decrease in current ration and Acid test ratio
5. Purchase of Inventory in cash is decrease in current assets thereby decrease in current ratio and acid test ratio
6. Purchase of equipment against 4 year note bond increases the debt thereby increase in debt equity ratio
7. Retirement of Bonds decrease in debt thereby decrease in debt equity ratio
8. Sale of coomon stock decrease the equity there by increase the debt equity ratio
9. Written of obselete inventory no impact in the Balance sheet. Here I assume that the inventory is not closing inventory
10. Purchase of short term investments in cash is no impact in the BS since the cash went and bonds come in current assets
11. currently maturing debt is refinance on a long term basis is thereby decrease in current liabilities so current ratio and Acid
test ratio increase and issuing the long term debt is increasing the debt thereby increase in debt equity ratio.

Answer 2

.	Issuance of long-term bonds	Iselected answer correct	Iselected answer correct	Iselected answer correct
2.	Issuance of short-term notes	Iselected answer correct	Iselected answer correct	Iselected answer correct
3.	Payment of accounts payable	Dselected answer correct	Dselected answer correct	Dselected answer correct
4.	Purchase of inventory on account	Iselected answer correct	Dselected answer correct	Iselected answer correct
5.	Purchase of inventory for cash	Nselected answer correct	Dselected answer correct	Nselected answer correct
6.	Purchase of equipment with a 4-year note	Nselected answer correct	Nselected answer correct	Iselected answer correct
7.	Retirement of bonds	Dselected answer correct	Dselected answer correct	Dselected answer correct
8.	Sale of common stock	Iselected answer correct	Iselected answer correct	Dselected answer correct
9.	Write-off of obsolete inventory	Dselected answer correct	Nselected answer correct	Iselected answer correct
10.	Purchase of short-term investment for cash	Nselected answer correct	Nselected answer correct	Nselected answer correct
11.	Decision to refinance on a long-term basis some currently maturing debt	Iselected answer correct	Iselected answer correct	N