a Cash (CA) 1

Common Shares (Equity) 1

Before transaction after transaction
Current Ratio: CA 6 = 1.2 7 = 1.4
CL 5 5
b
B/S
Merchandise Inventory (recorded at COST)

Income statement
Sales (at selling price) *with markup

Cash (CA) 10
Sales (Income) 10

Cost of Goods sold (Income statement/ Contra Revenue) 9

Inventory (CA) 9

C
Income Tax Payable (CL) 1
Cash (CA) 1

CR>1, CA>CL
Before transaction after transaction
Current Ratio: CA 6 = 1.2 -1 5 = 1.25
CL 5 -1 4

D. BV- 200 (FA 250, AD 50) SP 150

Cash (CA) 150
Accumulated Depreciation (Contra Asset) 50
Loss on sale (Loss/Expense) 50
Fixed Asset NCA 250

E. BV- 200 (FA 250, AD 50) SP 300

Cash (CA) 300

Accumulated Depreciation (Contra Asset) 50
Fixed Asset NCA 250
gain on sale (Income) 100

Total Current Effect on

Current Assets Ratio Net Income
a. Cash is acquired through issuance of additional + + 0
common stock.
b. Merchandise is sold for cash. + + +
c. Federal income tax due for the previous year is paid. - + 0
d. A fixed asset is sold for less than book value. + + -
e. A fixed asset is sold for more than book value. + + +

4-1
DSO= AR / (Annual sales/365)
AR
40 = $7 ,300,000/365
40= AR/$20,000
AR = $800,000

4-2
Debt
Total debt to total capital= Debt + Equity
Since M/B ratio = 1, market value of equity equals BV of equity
Common equity = stock price x #of Shares outstanding
$14 x 5,000,000 shares = $70M

Total invested Capital = Debt + Equity

$125M = Debt + $70M
Debt= $55M

Debt
Total debt to total capital= Debt + Equity
= $55/ $125
= 0.44 or 44%

4-3
ROE = NI/EQT

ROE= PM x TATO x EM

ROA

ROE= NI x S x TA
S TA EQT

ROA= PM x TATO
10%= 2% x TATO
TATO= 5 times

ROE= ROA x EM
15% = 10% X EM
EM= 1.5

4-4
M/B ratio= Market price per share/ Book Value per share
= $32/$7.5 = 4.2667

Book Value= common equity / Shares outs

= $6B / $800M = $7.5