Question

Scroll down to complete all parts of this task. The table below presents some ratios that were considered significant by an auditor in the current and prior year's audits of a client. Select from the option is provided the most likely explanation for the analytical results. Each choice may be used once more than once, or not at all Ratio Year 1 Explanation 1. Debt to equity Select an option below 2. Gross profit percentage 3. Quick 4. Inventory turnover 5. Return on equity Sales decreased compared with the prior year O Cost of goods sold increased during the year at a lower rate than sales increased O Proceeds from the issue of noncurrent debt were used to pay accounts payable O Capital stock was issued during the year, The entity may have accumulated excess and obsolete inventory RESET CANCEL ACCEPT

Answer 1

Ans.
Type of ratio	Formula	Year 2	Year 1	Explanation
		(%)	(%)
Debt to Equity	Total Liability/Total Shareholders Equity	1.99	4.61	This ratio represend liability percentage on shareholders fund.
				Reduced ratio show that liability getting reduced or equity getting enhanced.
Gross Profit percentage	Gross Profit/Turnover	38	41	Reduced ratio represent that COGS increased than sales.
Quick	(Current Assets - Inventory)/ Current Liability	2	1.5	This ratio tell liquidity capacity of company to pay current liability.
				Enhancemen of this ratio is good sign of liquidity.
Inventory turnover	Turnover/ Average Inventory	4.5	3.25	Higher turnover indicated that selling capacity is increasing. Which is good sign.
Return on equity	Net Income/ Shareholders Equity	3	8	This ratio indicate percentage of return over shareholders fund.
				Reduction of this ratio is not good sign entually.
It is to be noted that COGS is higher due to which Gross Profit Ratio got reduced this year.
Debt to Euity ratio reduced and return on equity also got reduced that means new Stock capital has been issued. So capital Stock issued during the year.