Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 6

Determining the Effects of Transactions on Debt-to-Assets, Asset Turnover, and Net Profit Margin Ratios
Using the transactions in CP5-1, complete the following table by indicating the sign of the effect (+ for increase, for decrease, NE for no effect, and CD for cannot determine) of each transaction. Consider each item independently.
TIP: To determine the impact of a transaction on a ratio, try an example with numbers. For example, assume asset turnover ratios of 9/10 or 10/9 and see how an increase of 1 in the top and bottom numbers affects the ratios.
TIP: A = L + SE implies that total assets are almost always greater than total liabilities. This means that if assets and liabilities change by the same dollar amount, the impact on liabilities will be proportionally bigger than the impact on assets.