1. Decisions made by management affect the ratios used to measure liquidity and solvency. Below are some transactions. Show how each would affect the stated ratio. Assume that each ratio is greater than 1 before the action is undertaken.

2.

Your audit manager asks you how to account for each of the following situations that current clients have encountered.

You are to identify the appropriate accounting treatment of each independent situation (from choice 1 -6 below) and describe to the manager how the specific situation should be handled in the financial statements (or not at all) in complete detail. Assume that each scenario has a material impact on the clients financial statements.

Decisions made by management affect the ratios used to measure liquidity and solvency. Below are some transactions. Show how each would affect the stated ratio. Assume that each ratio is greater than 1 before the action is undertaken. Action Current Ratio Acid-Test Ratio Debt-to- Equity Ratio 1. Payment of accounts payable 2. Purchase of inventory on account 3. Purchase of inventory with cash 4. Payment of bonds at maturity with sinking fund 5. Issuance of common stock for cash 6. Pay utilities expense 7. Purchase trading security with cash Payment of accounts payable if the ratios are less than 1 8. Your audit manager asks you how to account for each of the following situations that current clients have encountered. You are to identify the appropriate accounting treatment of each independent situation (from choice 1 - 6 below) and describe to the manager how the specific situation should be handled in the financial statements (or not at all) in complete detail. Assume that each scenario has a material impact on the client's financial statements. 1. 2. 3. As an unusual gain or loss As a prior period adjustment As a change in accounting principle As discontinued operations As a change in accounting estimate As a change in accounting estimate achieved by a change in accounting principle 4. 5. 6. a. C. e. JC Penney's closed a third of its stores. b. American Airlines changed the useful lives of its planes from 10 years to 15 years. A client discovered that 2019's depreciation expense was overstated. d. Another client switched its inventory costing method from weighted average to FIFO. The company owning the Washington Post sold off its online education division to the Purdue University. f. A company making high-tech components for self-driving cars took an inventory write-down when Tesla decided to use a different technology. g. A company changed its depreciation method from sum-of-the-year's digits to straight-line. h. An exporter had to record a loss related to its accounts receivable denominated in pounds sterling. Decisions made by management affect the ratios used to measure liquidity and solvency. Below are some transactions. Show how each would affect the stated ratio. Assume that each ratio is greater than 1 before the action is undertaken. Action Current Ratio Acid-Test Ratio Debt-to- Equity Ratio 1. Payment of accounts payable 2. Purchase of inventory on account 3. Purchase of inventory with cash 4. Payment of bonds at maturity with sinking fund 5. Issuance of common stock for cash 6. Pay utilities expense 7. Purchase trading security with cash Payment of accounts payable if the ratios are less than 1 8. Your audit manager asks you how to account for each of the following situations that current clients have encountered. You are to identify the appropriate accounting treatment of each independent situation (from choice 1 - 6 below) and describe to the manager how the specific situation should be handled in the financial statements (or not at all) in complete detail. Assume that each scenario has a material impact on the client's financial statements. 1. 2. 3. As an unusual gain or loss As a prior period adjustment As a change in accounting principle As discontinued operations As a change in accounting estimate As a change in accounting estimate achieved by a change in accounting principle 4. 5. 6. a. C. e. JC Penney's closed a third of its stores. b. American Airlines changed the useful lives of its planes from 10 years to 15 years. A client discovered that 2019's depreciation expense was overstated. d. Another client switched its inventory costing method from weighted average to FIFO. The company owning the Washington Post sold off its online education division to the Purdue University. f. A company making high-tech components for self-driving cars took an inventory write-down when Tesla decided to use a different technology. g. A company changed its depreciation method from sum-of-the-year's digits to straight-line. h. An exporter had to record a loss related to its accounts receivable denominated in pounds sterling