BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section
BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (−) to indicate a decrease, and (0) to indicate either no effect or an indeterminate effect Be prepared to state any necessary assumptions and assume an initial current ratio of more than 1.0. (Note: A good accounting background is necessary to answer some of these questions; if yours is not strong, answer the questions you can.)

images

Summary Introduction

To indicate: The effect of the given transactions on total assets, current ratio and net income.

Financial Ratio Analysis: Financial ratio analysis is one of the tools of financial analysis of a firm. It represents the relationship between two or more items of the financial statement.

Explanation

The table below represents the effect of given transactions,

Total Current AssetsCurrent RatioEffect on Net IncomeJustification
a.Cash is acquired through issuance of additional common stock.++0Increase in cash leads to an increase in total current assets and current ratio while there is no effect on the net income.
b.Merchandise is sold for cash.00+Merchandise and cash both are current assets, as one increases and other decreases, therefore there is no effect on current assets and current ratio, but the net income will increase.
c.Federal income tax due for the previous year is paid.˗˗+0Current liability and current assets decreases with the payment of income tax due for previous year, which leads toa decrease in current asset, increase in current ratiobut there are no changes in net income.
d.A fixed asset is sold for less than book value.++˗˗Cash increases with sale of fixed asset, therefore increase in current assets leads to an increase in current ratio, but thenet income will decrease due to loss.
e.A fixed asset is sold for more than book value.+++Cash increases with the sale of fixed asset, therefore the increase in current assets leads to an increase in current ratio and net income will also increase due to gain on sale of fixed asset.
f.Merchandise is sold on credit.00+Merchandise is a current asset and sale of it on credit will leads to an increase in account receivables and decrease in merchandise, as one increases and other decreases, therefore there is no effect on current assets and current ratio but the net income will increase.
g.Payment is made to trade creditors for previous purchases.˗˗+0Current liability and current assets decreases with the payment to trade creditors due for the previous purchase, which leads to a decrease in current assets, increase in current ratio but there is no change in the net income.
h.A cash dividend is declared and paid˗˗˗˗0Cash decreases with the payment of dividend leads to a decrease in current assets and current ratio but there is no change in the net income.
i.Cash is obtained through short-term bank loans.+˗˗0Increase in cash through short-term loans leads to an increase in total current assets and current liability, which decreases the current ratio while there is no effect on net income.
j.Short-term notes receivables are sold at a discount.˗˗˗˗˗˗Increase in cash through sale of short-term notes leads to an increase in one current assets and decrease in another current asset, which decreases the current assets, current ratio and net income as the sale is on discount...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Which one is best?

Foundations of Business (MindTap Course List)

Distinguish internal and external entities.

Accounting Information Systems

In what ways is economics a science?

Essentials of Economics (MindTap Course List)

Describe marketing uses of branding

MKTG 12:STUDENT ED.-TEXT

CORPORATE VALUATION Barrett Industries Invests a large sum of money in RD; as a result, it retains and reinvest...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What are the key provisions of SOX?

Pkg Acc Infor Systems MS VISIO CD