Effect of transactions on financial ratios Pappacoda, a macaroni producer, has a current ratio of 1.5, a receivables turnover of 5, and an inventory turnover (cost of sales/average inventory) of 10.

Required Consider the impact of each of the following events separately on Pappacoda’s current ratio, receivables turnover and inventory turnover. Will the ratio increase, decrease or be unaffected?

(a) Purchase of flour and other materials on account. The company assumes a FIFO flow of costs.

(b) Payment of suppliers of materials which were purchased previously on account.

(c) Sale of macaroni on account. Sale price exceeds cost.

(d) Write-off of a bad debt. No provision has been made for doubtful accounts.

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