To provide a consistent frame of reference for the company\'s financial statemen

Question

To provide a consistent frame of reference for the company's financial statements and ratios, assume that the folowing balance sheet and income statement reflect the company's pretransaction condition and performance. Fresno Furniture Manufacturing Inc.'s Pretransaction Statement of Financial Condition Fresno Furniture Manufacturing Inc.'s Statement of Financial Performance Sales Less: Cost of goods sold1 Gross proft Less: Operating expenses Operating profit (EBIT) Less: Inberest expense Earnings before taxes (EBT) Less: Tax expense Net income $15,000 Accounts payable 10,000 Wages payable 47D,000 Taxes payable 500,000 Notes payable $20,000 20,000 10,000 50,000 100,000 500,000 600,000 $5,000,000 2,00D,000 3,0DD,000 600,000 2,400,000 33,000 2,367,000 82B,450 $1,538,550 Marketable securities Accountsreceivable Inv Prepaid expenses 5,0DD Total current liabilities Total curment assets 1,0DD,000 Long-ten debt Total liabilities Gross plant and equipment Accumulated depreciation 1,500,000 Common stock Capital paid in excess of par 500,000 350,000 Net plant and equipment 1,000,000 Retained earnings 900,000 C 1,400,000| 2|nterest Cost of goods sold equals 40% of sales. Total equity Total debt and equity expense equals 6% of the combined Total assets $2,000,000 $2,000,000 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 accurs exactly as stated without interpreting it further. Do not consider any related transactions that may accur before or after the specified transaction.) Business Transaction 1 Fresno Furniture Manufacturing Inc (FFM) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share. Check if the Account Is Affected by the Specified Transaction Financial Ratio Ratio's Behavior Financial Account Debt ratio Fixed assets tumover Inventory tumover Basic earnings power Operating profit margin Current ratio Operating income Long-tem debt Capital paid-in excess of par Common stock Retained earnings Business Transaction 2 Fresno Furniture Manufacturing Inc. (FFM) pays $10,000 of its federal and state taxes payable. Check if the Account Is Affected by the Specified Transaction Financial Ratio Ratio's Behavio Financial Account Debt ratio Times interest earned Average collection period Return on assets Operating profit margin Quick ratio tem debt Prepaid expenses Taxes payable Net income

Explanation / Answer

Transaction 1

Financial account

effect of transaction-affected or unaffected

Ratio

Increased/decreased/unchanged

operating income

Unaffected

Debt ratio

decreased

long term debt

Unaffected

fixed asset turnover

remain unchanged

cash

Affected

Inventory turnover

remain unchanged

capital paid in excess of par

Affected

basic earning power

remain unchanged

common stock

Affected

operating profit margin

remain unchanged

retained earning

Unaffected

current ratio

remain unchanged

Transaction 2

Financial account

effect of transaction-affected or unaffected

ratio

Increased/decreased/unchanged

long term debt

unaffected

debt ratio

decrease

prepaid expenses

unaffected

times interest earned

remain unchanged

taxes payable

unaffected

average collection period

remain unchanged

cash

unaffected

return on assets

increase

net income

unaffected

operating profit margin

remain unchanged

quick ratio

remain unchanged

Transaction 1

Financial account

effect of transaction-affected or unaffected

Ratio

Increased/decreased/unchanged

operating income

Unaffected

Debt ratio

decreased

long term debt

Unaffected

fixed asset turnover

remain unchanged

cash

Affected

Inventory turnover

remain unchanged

capital paid in excess of par

Affected

basic earning power

remain unchanged

common stock

Affected

operating profit margin

remain unchanged

retained earning

Unaffected

current ratio

remain unchanged

Transaction 2

Financial account

effect of transaction-affected or unaffected

ratio

Increased/decreased/unchanged

long term debt

unaffected

debt ratio

decrease

prepaid expenses

unaffected

times interest earned

remain unchanged

taxes payable

unaffected

average collection period

remain unchanged

cash

unaffected

return on assets

increase

net income

unaffected

operating profit margin

remain unchanged

quick ratio

remain unchanged

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