Options for Ratio Behavior: No Change, Increase and Decrease

Fresno Furniture Manufacturing Inc.'s Pretransaction Statement of Financial Condition Cash $15,000 Accounts payable Marketable securities 10,000 Wages payable Accounts receivable 470,000 Taxes payable Inventory 500,000 Notes payable Prepaid expenses 5,000 Total current liabilities Total current assets 1,000,000 Long-term debt Total liabilities Gross plant and 1,500,000 Common stock equipment Accumulated depreciation 500,000 Capital paid in excess of par Net plant and equipment 1,000,000 Retained earnings Total equity Total assets $2,000,000 Total debt and equity $20,000 20,000 10,000 50,000 100,000 500,000 600,000 150,000 Fresno Furniture Manufacturing Inc.'s Pretransaction Statement of Financial Performance Sales $5,000,000 Less: Cost of goods sold1 2,000,000 Gross profit 3,000,000 Less: Operating expenses 600,000 Operating profit (EBIT) 2,400,000 Less: Interest expense 2 33,000 Earnings before taxes (EBT) 2,367,000 Less: Tax expense 3 828,450 Net income $1,538,550 350,000 900,000 1,400,000 $2,000,000 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.) Business Transaction 1 Fresno Furniture Manufacturing Inc. (FFM) purchases a new piece of equipment for $50,000, using a cash down payment of $5,000 and a note payable for the outstanding balance. Financial Ratio Ratio's Behavior Check if the Account Is Affected by the Specified Transaction Financial Account Retained earnings Gross plant and equipment Fixed assets turnover Quick ratio Times interest earned Average collection period Debt ratio Cash Cost of goods sold Accounts payable Notes payable Return on common equity Business Transaction 2 A $500,000 10-year bank loan is initiated, and the funds are placed in Fresno Furniture Manufacturing Inc. (FFM)'s checking account. Financial Ratio Ratio's Behavior Check if the Account Is Affected by the Specified Transaction Financial Account Times interest earned Return on assets Gross plant and equipment Cash Fixed asset turnover Long-term debt Marketable securities Common stock Gross profit margin Debt ratio Operating profit margin