FINANCIAL ACCOUNTING ETEXT CARD
FINANCIAL ACCOUNTING ETEXT CARD
10th Edition
ISBN: 9781260918373
Author: Libby
Publisher: INTER MCG
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 5, Problem 8P
To determine

Show the direction of effect of the following transaction on the under-mentioned ratios (+ for increase, -for decrease and NE for no effect).

Expert Solution & Answer
Check Mark

Answer to Problem 8P

Prepare the effects of transaction on ratios as given below:

Effects of transaction on ratios
TransactionTotal Asset TurnoverReturn on AssetsGross Profit Percentage
a. Borrowed $3,000 on a line of credit with the bank.DecreaseDecreaseNo effect
b. Incurred salary expense of $1,000 paid for in cash.IncreaseDecreaseNo effect
c. Provided $2,000 of services on account.IncreaseIncreaseIncrease
d. Purchased $700 of inventory on account.DecreaseDecreaseNo effect
e. Sold $500 of goods on account. The related cost of goods sold was $300. Gross profit margin was 45 percent before this sale.IncreaseIncreaseDecrease

Table (1)

Explanation of Solution

Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total asset.

Total asset turnover=Net salesAverage total assets

Return on assets: Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings relative to its total assets. The formula is stated below:

Return on assets=Net incomeAverage total assets

Gross Profit Percentage: Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.

Gross profit margin=Gross profitNet sales

The effects on the transaction can be explained as follows:

a. Borrowed $3,000 on a line of credit with the bank.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Cash (+A) $3,000 
     Note payable (+L)  $3,000
 ( To record the borrowing on a line of credit)   

Table (2)

  • Cash is a current asset. Issue of note payable increases the cash account by $3,000. Thus, cash is debited with $3,000.
  • Note payable is a liability. Borrowing of note payable increases the balance of cash. Thus, note payable is credited with $3,000.

b. Incurred salary expense of $1,000 paid for in cash.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Salary expense (+E, -SE) $1,000 
     Cash (-A)  $1,000
 ( To record the payment of salary expense)   

Table (3)

  • Salary expense is a component of income statement that decreases the net income by $1,000. Thus, salary expense is debited with $1,000.
  • Cash is a current asset. Payment of expenses decreases the balance of cash account. Hence, it is credited with $1,000.

c. Provided $3,000 of services on account.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Account receivable (+A) $2,000 
     Service revenue(+R, +SE)  $2,000
 ( To record the services provided on account)   

Table (4)

  • Accounts receivable is a current asset. Service provided on account increases the balance of accounts receivable. Hence, it is debited with 2,000.
  • Service revenue is a component of stockholders’ equity. Service revenue is an income that increases the balance of stockholders’ equity. Hence, it is credited with $2,000.

d. Purchased $700 of inventory on account.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Inventory (+A) $700 
     Accounts payable (+L)  $700
 ( To record the purchase of inventory on account)   

Table (5)

  • Inventory is a current asset. Purchase of inventory increases the balance of inventory. Thus, inventory is debited with $700.
  • Accounts payable is a current liability. Purchase of inventory on account increases the balance of accounts payable. Thus, accounts payable is credited with $700.

e. Sold $500 of goods on account. The related cost of goods sold was $300. Gross profit margin was 45 percent before this sale.

DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Accounts receivable(+A) $500 
     Sales revenue (+R, +SE)  $500
 ( To record the sales on account )   

Table (6)

  • Accounts receivable is a current asset. Account Sales increases the balance of accounts receivable. Thus, accounts receivable is debited with $500.
  • Sales revenue is a component of stockholders’ equity and it increases the stockholders’ equity or by $500. Hence, it is credited.
DateAccount title / ExplanationPost ref. DebitCredit
AmountAmount
 Cost of goods sold (+E,-SE) $300 
     Inventory(-A)  $300
 ( To record the cost of goods sold )   

Table (7)

  • Cost of goods sold is a component of stockholders’ equity and it decreases the stockholders’ equity by $300. Hence, it is debited.
  • Inventory is an asset. Sale of inventory decreases the balance of inventory. Thus, inventory is debited with $300.

Note: The net income goes up by $200 that increases the balance of ending assets by the same amount. As a result, average total assets increases by only$100($200×12). Hence, return on assets increases. However, the gross profit percentage on this sale was 40%(($500$300)$500) and the gross profit percentage before the sale was 45%, this transaction will decrease the ratio.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 5 Solutions

FINANCIAL ACCOUNTING ETEXT CARD

Ch. 5 - Prob. 11QCh. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - 14. Briefly define return on assets and what it...Ch. 5 - 1. If average total assets increase, but net...Ch. 5 - 2. If a company plans to differentiate its...Ch. 5 - 3. If a company reported the following items on...Ch. 5 - 4. Which of the following is one of the possible...Ch. 5 - Prob. 5MCQCh. 5 - Prob. 6MCQCh. 5 - Prob. 7MCQCh. 5 - Prob. 8MCQCh. 5 - Prob. 9MCQCh. 5 - 10. Net income was $850,000. Beginning and ending...Ch. 5 - Prob. 1MECh. 5 - Prob. 2MECh. 5 - Finding Financial Information: Matching Financial...Ch. 5 - Prob. 4MECh. 5 - Determining Financial Statement Effects of Sales...Ch. 5 - Recording Sales and Cost of Goods Sold and...Ch. 5 - Computing and Interpreting Return on...Ch. 5 - E5-1 Matching Players in the Accounting...Ch. 5 - Prob. 2ECh. 5 - E5-3 Finding Financial Information: Matching...Ch. 5 - Prob. 4ECh. 5 - Campbell Soup Company is the world’s leading maker...Ch. 5 - Prob. 6ECh. 5 - Macy’s, Inc., operates the two best-known high-end...Ch. 5 - E5-8 Preparing a Classified (Multiple-Step) Income...Ch. 5 - Tableau Software provides business analytics...Ch. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Pacific Gas and Electric Company is a giant public...Ch. 5 - Hasbro is one of the world’s leading toy...Ch. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - The TJX Companies, Inc., which operates the T.J....Ch. 5 - Analyzing and Evaluating Return on Assets from a...Ch. 5 - What would be the direction of the effect of the...Ch. 5 - Prob. 1PCh. 5 - Matching Definitions with Balance Sheet-Related...Ch. 5 - Exquisite Jewelers is developing its annual...Ch. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - Prob. 8PCh. 5 - Preparing a Multiple-Step Income Statement with...Ch. 5 - Prob. 1APCh. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 1CONCh. 5 - Prob. 2CONCh. 5 - Refer to the financial statements of American...Ch. 5 - Refer to the financial statements of Express, Inc....Ch. 5 - Prob. 3CPCh. 5 - Prob. 4CPCh. 5 - Making Decisions as a Manager: Evaluating the...Ch. 5 - Megan Company (not a corporation) was careless...Ch. 5 - Prob. 7CP
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
The ACCOUNTING EQUATION For BEGINNERS; Author: Accounting Stuff;https://www.youtube.com/watch?v=56xscQ4viWE;License: Standard Youtube License