Effects of Transactions on Various Financial Ratios [LO2, LO3, LO4]

In the right-hand column below, certain financial ratios are listed. To the left of each ratio is a business transaction or event relating to the operating activities of Graham Company.

Business Transaction or Event Ratio 1. Inventory was sold for cash at a profi t. Debt-to-equity ratio 2. Land was purchased for cash. Earnings per share 3. Inventory was sold on account at cost. Acid-test ratio 4. Some accounts payable were paid off. Working capital 5. A customer paid an overdue bill. Average collection period 6. A cash dividend was declared, but not yet paid. Current ratio 7. A previously declared cash dividend was paid. Current ratio 8. The company’s common stock price increased. Book value per share 9. The company’s common stock price increased and earnings per share remained unchanged.
Dividend yield ratio 10. Property was sold for a profi t. Return on total assets 11. Obsolete inventory was written off as a loss. Inventory turnover ratio 12. Bonds were sold with an interest rate less than the company’s return on assets.
Return on common stockholders’ equity 13. The company’s common stock price decreased and the dividend paid per share remained the same.
Dividend payout ratio 14. The company’s net income decreased, but long-term debt remained unchanged.
Times interest earned 15. An uncollectible account was written off against the Allowance for Bad Debts.
Current ratio 16. Inventory was purchased on credit. Acid-test ratio 17. The company’s common stock price increased and earnings per share remained unchanged.
Price-earnings ratio 18. The company paid off some accounts payable. Debt-to-equity ratio Required:
Indicate the effect that each 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, and give the reason for your choice. In all cases, assume that the current assets exceed current liabilities both before and after the event or transaction. Use the following format for your answers:
Effect on Ratio Reason for Increase, Decrease, or No Effect 1.
2.
Etc.