You've been asked to tutor Gavin, a finance student who doesnt 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 Gavin to complete. The purpose of these exercises is to help Ga (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. International Imports Inc.'s Pretransaction Statement of Financial Condition International Imports Inc.'S Pretransaction Statement of Financial Performance Sales Less: Cost of goods sold1 Gross profit Less: Operating expenses Operating profit (EBIT) Less: Interest expense2 Earnings before taxes (EBT) Less: Tax expense Net income $15,000 Accounts payable Cash Marketable securities Accounts receivable Inventory Prepaid expenses $20,000 20,000 10,000 50,000 100,000 500,000 600,00O 150,000 350,000 900,000 1,400,000 $5,000,000 2,000,000 3,000,000 600,000 2,400,000 33,000 2,367,000 828,450 $1,538,550 10,000 Wages payable 470,000 Taxes payable 500,000 Notes payable 5,000 Total current liabilities Total current assets 1,000,000 Long-term debt Gross plant and equipment Accumulated depreciation Net plant and equipment Total liabilities Common stock Capital paid in excess of par 1,500,000 500,000 1,000,000 Retained earnings Total equity Total debt and equity Total assets $2,000,000 $2,000,000 | |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 International Imports Inc. (21) incurs and pays $150,000 of additional operating expenses, using a check. Check if the Account Is Affected by the pecified Transaction Financial Ratio Ratio's Behavior Financial Account Inventory Cash Accounts payable EBIT Prepaid expenses Operating expenses Average collection period Debt ratio Net profit margin Fixed assets turnover Current ratio Inventory turnover ratio