Most decisions made by management impact the ratios analysts use to evaluate per

Question

Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken. 1. Issuance of long-term bonds 2. Issuance of short-term notes 3. Payment of accounts payable 4. Purchase of inventory on account 5. Purchase of inventory for cash 6. Purchase of equipment with a 4-year note 7. Retirement bonds 8. Sale of common stock 9. Write-off of obsolete inventory 10. Purchase of short-term investment for cash 11. Decision to refinance on a long-term basis some currently maturing debt

Explanation / Answer

ACTION

CURRENT RATIO

ACID-TEST RATIO

DEBT TO EQUITY RATIO

Issuance of long-term bonds

I

I

I

Issuance of short-term notes

I

I

I

Payment of accounts payable

D

D

D

Purchase of inventory on account

I

D

I

Purchase of inventory for cash

N

D

N

Purchase of equipment with a 4-year note

N

N

I

Retirement of bonds

D

D

D

Sale of common stock

I

I

D

Write-off of obsolete inventory

D

N

I

Purchase of short-term investment for cash

N

N

N

Decision to refinance on a long-term basis some currently maturing debt

I

I

N

ACTION

CURRENT RATIO

ACID-TEST RATIO

DEBT TO EQUITY RATIO

Issuance of long-term bonds

I

I

I

Issuance of short-term notes

I

I

I

Payment of accounts payable

D

D

D

Purchase of inventory on account

I

D

I

Purchase of inventory for cash

N

D

N

Purchase of equipment with a 4-year note

N

N

I

Retirement of bonds

D

D

D

Sale of common stock

I

I

D

Write-off of obsolete inventory

D

N

I

Purchase of short-term investment for cash

N

N

N

Decision to refinance on a long-term basis some currently maturing debt

I

I

N

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