Indicate the immediate effects (increase, decrease, no effect) of each of the following independent transactions on (1) the rate of return on shareholders equity, (2) the current ratio, and (3) the liabilities to assets ratio. State any necessary assumptions.

b. A firm sells for $150,000, on account, merchandise inventory costing $120,000.

Answer:

(1) the rate of return on shareholders' equity: No effect

(2) the current ratio: increase

(3) the liabilities to assets ratio: decrease

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