11. The effect of transactions on ratios You've been asked to tutor Kai, a finance student who doesn't feel comfortable about his understanding of the relationship between a company's business activities, its financial accounts, and the company's financial ratios. To better appreciate these relationships, you've created the following exercises for Kai to complete. The purpose of these exercises is to help Kai (1) understand the effect of business transactions on financial statementsuch 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. To provide a consistent frame of reference for the company's financial statements and ratios, assume that the following balance sheet and income statement reflect the company's pretransaction condition and performance. 1 Cost of goods sold equals 40% of sales. 2 Interest expense equals 6% of the combined notes payable and long-term debt balances. 3The 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 transaction 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 National Transmissions Inc. (NTI) sells 25,000 shares of new common stock ( $1 per share par value) to new and existing shareholders for $20 per share. Business Transaction 2 National Transmissions Inc. (NTI) pays $10,000 of its federal and state taxes payable. Business Transaction 2 National Transmissions Inc. (NTI) pays $10,000 of its federal and state taxes payable. 11. The effect of transactions on ratios You've been asked to tutor Kai, a finance student who doesn't feel comfortable about his understanding of the relationship between a company's business activities, its financial accounts, and the company's financial ratios. To better appreciate these relationships, you've created the following exercises for Kai to complete. The purpose of these exercises is to help Kai (1) understand the effect of business transactions on financial statementsuch 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. To provide a consistent frame of reference for the company's financial statements and ratios, assume that the following balance sheet and income statement reflect the company's pretransaction condition and performance. 1 Cost of goods sold equals 40% of sales. 2 Interest expense equals 6% of the combined notes payable and long-term debt balances. 3The 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 transaction 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 National Transmissions Inc. (NTI) sells 25,000 shares of new common stock ( $1 per share par value) to new and existing shareholders for $20 per share. Business Transaction 2 National Transmissions Inc. (NTI) pays $10,000 of its federal and state taxes payable. Business Transaction 2 National Transmissions Inc. (NTI) pays $10,000 of its federal and state taxes payable