Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, manage
ID: 2435040 • Letter: T
Question
Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, management at Tornado determines that it will need to replace some machinery four years from now [on December 31, 2014], and which it estimates will cost $160,000 on that date. Management decides to have $160,000 available on December 31, 2014 by making 4 equal annual deposits into a fund at its bank each December 31. It is estimated that the interest rate the deposits will earn is 7% compounded annually.Assume that each annual deposit to be made is $35,000.
Which one of the following statements is correct about the effect the deposit [e.g. $35,000] made on December 31, 2011 had in 2011 (at December 31, 2011)?
A. decreased current assets
B. decreased the asset turnover ratio [net sales/ave. total assets]
C. increased the gross profit margin ratio
D. increased the debt-to-assets ratio
Explanation / Answer
The amount invested will decrease the cash (current assets) and will increase Investments (long term). Hence it will decrease the current assets. A. decreased current assets