You've been asked to tutor Sofie, a finance student who doesn't feel comfortable about her 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 Sofie to complete. The purpose of these exercises is to help Sofic (1) understend 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. Phoenix Golf Club Co. (PGC) switches from holding an available inventory to a fust-in-time inventory system, thereby reducing its inventory by 80.00%. 1 Cost of goods sold equals 40% of sales. Interest expense equals 6% of the combined notes payable and long-term debt balances. The 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. Assume there are 365 days in a year.) Business Transaction 1 Phoenix Goif Club Co. (PGC) sells 25,000 shares of new common stock ( $1 per share par value) to new and existing shareholders for $20 per share. Cn 03: Assignment- Analysis of Financial Statements \begin{tabular}{lc} \hline Phoenix Golf Club Co:'s Pretransaction Statement of Financial Performance \\ \hline Sales & $5,000,000 \\ Less: Cost of goods sold: & 2,000,000 \\ Gross profit & 3,000,000 \\ Less: Operating expenses & 600,000 \\ Operating profit (EBm) & 2,400,000 \\ Less: Interest expense? & 33,000 \\ Earnings before taxes (EBT) & 2,367,000 \\ Less: Tax expense? & 828,450 \\ Net income & $1,538,550 \\ \hline \end{tabular}