Question 3: Short answers Below each question, please provide a concise answer to each question. Be sure to think about the question, the material covered in class and the text and to focus your answer around the topics we have discussed. Be sure that I can determine that you understand the relevant course material from the answer you provide. Keep in mind that copying material from other sources does little to help me determine what you understand. Required 1. Firms current ratios are usually greater than 1 and less than 2.5. How does a large current ratio affect return on equity? [4 pts.] 2. Assume that Woods Co., Inc. operates within a reasonably competitive product market. If WoodsCo. Inc. increases the price it charges for its products in an attempt to increase its ROE, will it likely succeed? Explain your answer. [8 pts.] 3. Using the definition of leverage discussed in class, explain how the use of leverage affects a firm's net income. [4 pts.] 4. We discussed in class that the effects of using LIFO vs. FIFO for costing inventory equalize overtime in much the same way that effects from differences in depreciation schedules equalize overtime. However, firms typically recognize deferred taxes related to depreciation, but not due to differences in LIFO vs. FIFO. Explain why a firm may not recognize deferred tax effects in connection with its choice of inventory costing assumptions. As part of your answer, be sure to indicate when a firm's inventory costing assumption will cause recognition of deferred taxes. [8 pts.] 5. Recently, the effects from Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606) have been seen in most public firms. While many firms indicated that adoption of the new revenue recognition principle had no effect upon the timing of their revenue recognition, some firms indicated the new principle had significant effects upon their statements. For the firms where the new principle affected the timing of revenue, did the new revenue recognition principle speed or slow revenue recognition. Explain. [4 pts.] 6. Explain the concept of a firm's cash conversion cycle. How do financial statement ratios provide insight into a firm's cash conversion cycle? [8 pts.]