History Bookmarks 12. The effect of transactions on ratios You've been asked to tutor Luis, 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 Luis to complete. The purpose of these exercises is to help Luis (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, you1l want to nun the calaulations 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. National Transmissions Inc.'s Pretransaction ational Transmissions Inc.'s Statement of Financial Condition Pretransaction $15,000 Accounts payable Statement of Financial Performance $20,000 Marketable securities 10,000 Wages payable 470,000 Taxes payable 10,000 Less: Cost of goods sold Notes payable Gross profit 600,000 Operating profit (EBIT) 33,000 Gross plant and equipment 1,500,000 Common stock 150,000 Earnings before taxes (EBT) 2,367,000 tion 500,000 Capital paid in excess of par 350,000 Less: Tax expenses Net plant and equipment 1.000.000 Retained earnings $1,538,550 1,400,000 Total debt and equity $2,000,000 Cost of goods sold equals 40% of sales. zinterest expense equals 6% of the combined notes payable and long-term debt balances. The average federal and state tax rate is 35%. Indicate f any of the listed financial statement accounts is by the following busness transactions and whether ratios will increase decrease, affected the listed or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without terpreting it further. Do not consider any related transactions that may occur before or after the speci ed