11. The effect of transactions on ratios You've been asked to tutor Ashley, a finance student who doesn't feel comfortable about her understanding of the relationship between a company's business activities, its financial accounts, and the compony's financial ratios. To better appreciate these relationships, you've created the following exercises for Ashley to complete. The purpose of these exercises is to help Ashley (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 loter today, you?l want to run the calculations on the following two business transactions, to verify the accuracy of your answers. To provide a consistent frame of reference for the company's financial statements and ratios, assume that the following balance sheet and income statement refiect the company's pretransaction condition and performance. 1Cost of goods sold equals 40% of sales. aInterest expense equals 6% of the combined notes payable and long-term debt balances. The average federal and state tax rate is 35%. Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business trarsaction occurs exactly as stated without. interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction, Assume there are 365 days in a year.) Business Transaction 1 Welington Industries (Wellington) selis 25,000 shares of new common stock ( $1 per share par value) to new and exists ig shareholders Wellington Industries (Wellington) sells 25,000 shares of new common stock ( 1 per share par value) to new and existing shareholders for 520 per share. Business Transaction 2 Wellington Industries (Wellington) pays $10,000 of its federal and state taxes payable