The effect of transactions on ratios

You've been asked to tutor Josh, 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 Josh to complete. The purpose of these exercises is to help Josh (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, 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 National Transmissions Inc.'s Statement of Financial Condition Statement of Financial Performance $20,000 20,000 10,000 50,000 Cash $15,000 Accounts payable $5,000,000 2,000,000 3,000,000 600,000 2,400,000 33,000 2,367,000 10,000 Wages payable 70,000 Taxes payable 500,000 Notes payable Less: Cost of goods sold Gross profit Accounts receivable 5,000 00,000 Less: Operating expenses Prepaid expenses Total current liabilities 500,000 Operating profit (EBIT Total current assets ,000,000 Long-term debt Less: Interest expense Earnings before taxes (EBT Less: Tax expense Net income Total liabilities 600,000 150,000 350,000 00,000 1,400,000 2,000,000 Gross plant and equipment 1,500,000 Common stock 500,000 Capital paid in excess of par ,000,000 Retained earnings Net plant and equipment 1,538,55 Total equity Total debt and equity Total assets $2,000,000 Cost of goods sold equals 40% of sales. 2|nterest expense equals 6% of the combined notes payable and long-term debt balances he average federal and state tax rate is 35%