In the right-hand column below, certain Snancial ratios are listed. To the left
ID: 2438539 • Letter: I
Question
In the right-hand column below, certain Snancial ratios are listed. To the left of each ratio is a business transaction or event relating to the operating activities of Flatiron Company Ratio Business Transaction or Event 1. Declared a cash dividend 2. Sold inventory on account at cost 3 Issued bonds with an interest rate of 9%. The company's return on Current ratio Acid-test (quick) ratio Return on common stockholders' equity assets is 12% 4. Net income decreased by 10% between last year and this year Times interest earned Current ratio Long-term debt remained unchanged 5. Paid a previously declared cash dividend 6. The market price of the company's common stock dropped from 22? to 18 The dividend paid per share remained unchanged 7, Obsolete inventory totaling $125,000 was written off as a loss. 8. Sold inventory for cash at a profit. 9. Changed customer credit terms from 2/10, n/15 to 2/15, n/30 to Dividend payout ratio Inventory turnover rabio Debt-to-equity ratio Accounts receivable comply with a change in industry practice 10. Issued a common stock dividend on common stock 11. The market price of the comparny's common stock tunover ratio Book value per share increased from Book value per share Working capital Earnings per share 22% to 3216 12. Paid $55,000 on accounts payable 13, Issued a common stock dividend to common stockholders 14. Paid accounts payable. 15. Purchased inventory on credit terms. 16. Wrote off an uncollectible account against the Allowance for Bad Debts 22% to 32h. Earnings per share remained unchanged 22's to 32%. The dividend paid per share remained unchanged. Acid-test (quick) ratio Current ratio Price earnings ratio Dividend yield ratio 17. The market price of the company's common stock increased from 18. The market price of the company's common stock increased from Required Indicate the effect that each business transaction or event would have on the ratio listed opposite to it State the effect in terms of increase, decrease, or no effect on the ratio involved. In all cases, assume that the current assets exceed the current liabilities both before and after the event or transaction. Ratio Effect on Ratio 1. Current ratio 2. Acid-test (quick) ratio 3. Return on common stockholders' equity 4. Times interest earned 5. Current ratio 6. Dividend payout ratio 7. Inventory turnover ratio 8. Debt-to-equity 9. Accounts receivable turnover ratio 10 Book value per share ratio 11. |Book value per share 12. Working capital 13. Earnings per share 14. Debt-to-equity ratio 15. Acid-test (quick) ratio 16. Current ratio s ratio 18. Dividend yield ratioExplanation / Answer
i) Effect of cash Dividend declared on Current Ratio
Retained earnings and Cash are reduced by the total value of the dividend. Because When the dividends are paid, the effect on the balance sheet is a decrease in the company's retained earnings and its cash balance.
ii) Effect of sold Inventory at cost on Acid Test Ratio
Acid Test Ratio= (Current Assets-Inventory)/Current Liability
Quick Ratio doesnot include inventory. In the event of crises, it cannot easily converted into cash.
If you can quickly get cash for your inventory without losing its value, inventory increases your liquidity
iii) Return on common Stockholder's Equity
Return on common stockholders' equity ratio measures the success of a company in generating income for the benefit of common stockholders. It is computed by dividing the net income available forcommon stockholders by common stockholders'equity. The ratio is usually expressed in percentage
Operating income - Interest Expense - Tax Expense = Net Income
iv) Times Interest Earned
Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. It may be calculated as either EBIT or EBITDA divided by the total interest payable.Interest Charges = Traditionally "charges" refers tointerest expense found on the income statement.
v) Effect of cash dividend on current ratio
When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased. ... The net result of the declaration and payment of the dividend is that the corporation's assets and stockholders' equity have decreased.
vi) Effect of drop of market price of equity
When market Income decreses, cost of equity (Ke) Increases . and Growth (g) decreases.
Cost of Equity (Ke)= D1/P0 + g
vii) Obsolete Stock loss on Inventory Turmnover Ratio
Inventory turnover ratio is computed by dividing the cost of goods sold by averageinventory at cost. The formula/equation is given below: Two components of the formula of inventory turnover ratio are cost of goods sold and average inventoryat cost.