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Accounting Exercise 3-20

In: Business and Management

Submitted By mhorsgirl268
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Exercise 3-20 The only method to ascertain the answers to these ratio questions, other than guessing is to calculate the effect on the ratio. I have set up the following values that will be used to calculate the ratios: Trial Balance Cash 2000 Accounts receivable 2000 Investments 2500 Prepaids 3000 Inventories 4000 Equipment 2500 Current liabilities 2000 Total liabilities 10000 Total shareholders equity 20000 Below, I place the ratio formula in each cell. Note that I place a $ before the column letter and a $ before the row number. This is so the formula will not change when I copy the formula down to the other actions. I review the action and ascertain what accounts would be affected by the action, and then I the change the amounts above in the trial balance to ascertain the effect of the "action" on the ratio For example: Issuance of long term bonds will increase cash and increase long term liabilities. I will change cash from 1000 to 2000 and total liabilities from 9000 to 10,000 When you change cash and total liabilities, the current ratio changes from 6.25 to 6.75 it increased The Acid test ratio changed from 2.75 to 3.25, it increased. The Debt to Equity ratio changed from .45 to to .5, it increased.

Action Current Ratio I/D/No effect Acid Test Ratio I/D/No effect Debt to Equity Ratio I/D/No effect
1 Issuance of long term bonds 6.75 I 3.25 I 0.5 No effect
2 Issuance of short term notes 5.25 I 3.25 I 0.5 No effect
3 Payment of accounts payable 1.25 No effect 0.5 No effect
4 Purchase of inventory on account
5 Purchase of inventory for cash
6 Purchase of equipment with a four year note
7

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