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E3-20 Effect of management decisions on ratios

E3-20 Effect of management decisions on ratios
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Solution Guide / Answer Key:

Intermediate Accounting, 6th Edition, Spiceland
Acc305 Intermediate Accounting (Ashford University)

E 3-20 Effect of management decisions on ratios

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.

Current Acid-test Debt to
Action Ratio Ratio Equity Ratio

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 of 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



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