This problem demonstrates the effects of transactions on the current ratio and the debt ratio of Rockwell Company. Rockwell's condensed balance sheet at March 31, 20X1, follows.
(In millions)
Total current assets .................................. $3.0
Properties, net, and other assets ............... 3.8
$6.8
Total current liabilities ............................. $2.2
Total long-term liabilities ......................... 2.4
Total stockholders' equity ........................ 2.2
$6.8
During the following year, ending March 31, 20X2, Rockwell completed the following transactions:
a. Paid half the current liabilities.
b. Borrowed $3 million on long-term debt.
c. Earned revenue of $2.5 million on account.
d. Paid selling expense of $1 million.
e. Accrued salary expense of $0.8 million. Credit Salary Payable, a current liability.
f. Purchased equipment for $4.2 million, paying cash of $1.4 million and signing a longterm note payable for $2.8 million.
g. Recorded depreciation expense of $0.6 million.
Required
1. Compute Rockwell's current ratio and debt ratio at March 31, 20X1. Round to 2 decimal places.
2. Consider each transaction separately. Compute Rockwell's current ratio and debt ratio after each transaction during 20X2, that is, 7 times. Round ratios to 2 decimal places.
3. Based on your analysis, you should be able to readily identify the effects of certain transactions on the current ratio and the debt ratio. Test your understanding by completing these statements with either "increase" or "decrease":
a. Revenues usually ____________ the current ratio.
b. Revenues usually ____________ the debt ratio.
c. Expenses usually ____________ the current ratio. (Note: Depreciation is an exception to this rule.)
d. Expenses usually ____________ the debt ratio.
e. If a company's current ratio is greater than 1.0, as for Rockwell, paying off a current liability will always ____________ the current ratio.
f. Borrowing money on long-term debt will always ____________ the current ratio and ____________ the debt ratio.