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The problem says: Transactions may increase or decrease a particular ratio, or have no effect. The first column below lists a transaction. The second column lists a ratio along with its value just before the indicated transaction. In the third column, indicate the immediate effect of the transaction on the ratio by clicking on the related cell and select increase, decrease, or no effect from the list provided

Transaction: Pay accounts payable
Ratio and Value Before Transaction: Current ratio, .90 (90%)
Effect: I said Increase.

If the Current Assets before the transaction were 10 and Current Liabilities were 5, then if you decreased top and bottom by same amount of let’s say, one, your ratio would increase. CA went from 10 down to 9 and your CL went from 5 down to 4, that’s a 2.25 ratio, and increase.

Answer Solution:Pay accounts payable: cash (current assets) and accounts payable (current liabilities) decrease by the same amount. Current assets decrease by a larger percentage because the numerator before the transaction is smaller than the denominator. Therefore, the ratio decreases.

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BEC - 87
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REG - 75

practice, Practice, PRACTICE!

[CH89]

In the example you provided to explain your reasoning, the current ratio was greater than 1. In the problem, it looks as if the current ratio is less than 1. Since the ratio is less than 1, a decrease in current assets and liabilities will cause the ratio to decrease. Similarly how you did it in your example, apply the same logic to the ratio provided.
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We know the current ratio is .90, or for simplicity 9/10. If we reduce both sides equally, let's say by 5, we are left with 4/5. A current ratio of 4/5 is .80, leaving us with a decrease. Hope this helps, and best of luck!

AUD - 84
BEC - 82
FAR - 76
REG - 79

What a journey! It took me 12 attempts, do not give up, keep going! Praise God!

Passed Exams: 8/25/2020

Licensed in Pa: 11/24/2020

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CH89, that did help! For some reason it clicked. If a ratio is below one, it can only get lower because it's already below one. The ratio will get smaller. If it increases, it will only get higher. I still need to practice, but your reply help. Thank you.

AUD - 76
BEC - 87
FAR - 78
REG - 75

practice, Practice, PRACTICE!

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Another ratio:
The problem says to indicate the immediate effect of the transaction on the ratio by clicking on the related cell and select increase, decrease, or no effect from the list provided.
What is the effect on the Inventory turnover if you: Purchase inventory at year end (not sold) Inventory turnover, 11.4.

At first I thought decrease, which is the correct answer but when I did the math I changed it to increase.
I plugged in dummy numbers and started with the inventory turnover ratio: COGS/Avg. Inventory Turnover. So, let's say 5/10 – 5. With a purchase of inventory at year end, the numerator in the ratio will stay the same but the denominator will increase, so I changed the ratio from 5/11 which is .45 – a decrease. Then I plugged those numbers into an inventory turnover, starting with 365/5 = 73 and 365/.45 – 811 so I thought the inventory turnover increased. Can someone tell me how I'm misinterpreting the ratios.

Also: Return on Assets: When interest expense is on the income statement which effects the Net income, where do we learn that you have to add interest expense minus the taxes paid to the net income total in order to calculate your Net Income/Total Assets? when doing this problem, I missed that the first time because I just took the Net Income from the income statement and calculated Net Income / Avg. Return on Assets. The problem solved for net income 420 + interest expense which was 100*70% = 420 + 70 = 490/2600 = 0.19. The tax was 30%. How is 70% of the interest expense included in your net income figure.

AUD - 76
BEC - 87
FAR - 78
REG - 75

practice, Practice, PRACTICE!

[Author]

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