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Lecture

module_15_solutions.pdf

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Department
Administrative Studies
Course
ADMS 2500
Professor
All Professors
Semester
Fall

Description
Financial Statement Analysis Practice Problems Solutions PROBLEM 1MULTIPLE CHOICE1 dExplanationNoteKeep the balance sheet equation in mind when doing these types of problems AssetsLiabilitiesEquitya Collects accounts receivableHas no affect on ratio because a current asset increases cash and a current asset decreases accounts receivable by the same amount so no affect on equity and the debtequity ratioAssetsLiabilitiesEquity EquityAssetsLiabilities EquityAssets and by the same amountLiabilities So no change in the equation and no affect on the ratio b Borrows cash giving a shortterm note payableWill not change the ratio because borrowing cash will increase current assets and current liabilities by the same amount thus no affect on equity or longterm liabilitiesEquityAssetsLiabilities EquityAssets by the same amount as liabilitiesLiabilities by the same amount as assetsSo no change in equity but and increase in total debt causes an increase in the ratio cPurchases land for cashHas no affect on ratio because an asset increases land and an asset decreases cash by the same amount so no affect on equity and the debtequity ratioAssetsLiabilitiesEquity EquityAssetsLiabilities EquityAssets and by the same amountLiabilities So no change in the equation and no affect on the ratio d Issues stock for cashWill decrease the ratio because issuing stock will increase an asset cash and increase and equity account stockThis has no affect on total debt but increases equity thus causing a decrease in the debtequity ratioEquityAssetsLiabilities Equity by the same amount as assetsAssets by the same amount as equityLiabilities So increase in equity but and no increase in total debt causes an decrease in the ratio
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