Assignment Financial Reporting & Analysis ch 8

Assignment Financial Reporting & Analysis ch 8 -...

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1 PROBLEMS 1. Required: Indicate the effect of the transactions listed below on each of the following: working capital, current ratio, debt ratio, net income, and stockholders' equity. Use + to indicate an increase, - to indicate a decrease, and 0 to indicate no effect. Assume an initial current ratio of more than 1 to 1. Working Current Debt Net Stockholder's Transaction Capital Ratio Ratio Income Equity a. A cash dividend is declared and paid. - - + 0 - b. Cash is obtained through long-term bank loans. (Do not consider interest.) + + + 0 0 c. Equipment is purchased with short-term notes. (Do not consider interest.) - - + 0 0 d. Merchandise is purchased on credit. 0 - + 0 0 e. A fixed asset is sold for more than book value. + + - + + f. A stock split takes effect. 0 0 0 0 0 g. Current operating expenses not previously recognized are paid. - - + - - h. A firm makes a long-term cash investment in the stock of a consolidated subsidiary. - - 0 0 0 i. A firm recognizes depreciation expense. 0 0 + - - j. A firm refinances short-term notes with long-term notes. (Ignore interest.) + + 0 0 0 2. DuBois, Inc., experienced the following trend in operating profit ratios for the five years ended in 2008.
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2 Operating Income Return on Margin Operating Assets 2008 9.7% 12.2% 2007 9.3% 11.5% 2006 9.1% 11.2% 2005 8.8% 10.6% 2004 8.6% 10.1% Required: Using the DuPont analysis, determine whether the trend in turnover increased the return on operating assets or lowered it.
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3 ANS: Operating Return on Operating Income × Asset Operating Assets = Margin Turnover 2008 12.2% = 9.7% × 1.26 2007 11.5% = 9.3% × 1.24 2006 11.2% = 9.1% × 1.23
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