11. The effect of transactions on ratios Aa Aa You've been asked to tutor Alyssa, a finance student who doesn't feel comfortable about her understanding of the relationship between a company's business activities, its financial accounts, exercises for Alyssa to complete. The purpose of these exercises is to help Alyssa (1) understand the effect of business transactions on financial statement-such as balance sheet and income statement-accounts and (2) how these changes in the numerators and denominators of financial ratios affect the ratios' values. However, before using these exercises in your tutoring session later today, you'll want to run the calculations on the following two business transactions, to verify the accuracy of your answers and the company's financial ratios. To better appreciate these relationships, you've created the following To provide a consistent frame of reference for the company's financial statements and ratios, assume that the folowing balance sheet and income statement reflect the company's pretransaction condition and performance. Edinburgh Exports Inc.'s Pretransaction Statement of Financial Condition Edinburgh Exports Inc.'s Pretransaction Statement of Financial Performance Sales Less: Cost of goods sold Gross profit Less: Operating expenses Operating profit (EBIT) Less: Interest expense2 Earnings before taxes (EBT) Less: Tax expense Net income Cash Marketable securities Accounts receivable Inventory Prepaid expenses 15,000 Accounts payable $20,000 20,000 10,000 50,000 100,000 500,000 600,000 150,000 350,000 900,000 1,400,000 $2,000,000 $5,000,000 2,000,000 3,000,000 600,000 2,400,000 33,000 2,367,000 828,450 $1,538,550 10,000 Wages payable 470,000 Taxes payable 500,000 Notes payable 5,000 Total current liabilities Total current assets 1,000,000 Long-term debt Total liabilities Gross plant and equipment 1,500,000 500,000 1,000,000 Common stock Capital paid in excess of par Retained earnings Net plant and equipment Total equity Total debt and equity Cost of goods sold equals 40% of sales. 2!nterest expense equals 6% of the combined notes payable and long-term debt balances Total assets $2,000,000 |