Indicate the effect of each of the following transactions on (1) the current ratio, (2) working capital, (3) stockholders’ equity, (4) book value per share of common stock, and (5) retained earnings. Assume that the current ratio is greater than 1:1. (Indicate the effect of each transactions by selecting "+" for increase, "–" for decrease, and "NC" for no change.)
Transactions:
A. Collected account receivable.
B. Wrote off account receivable.
C. Converted a short-term note payable to a long-term note payable.
D. Purchased inventory on account.
E. Declared cash dividend.
F. Sold merchandise on account at a profit.
G. Issued stock dividend.
H. Paid account payable.
I. Sold building at a loss.
Effect:
Current Ratio Working Capital Stockholders Equity Book Value Retained EarningsA. B.C. D.E. F.G. H.I

A. Collected account receivable.

(1) the current ratio NC

(2) working capital NC

(3) stockholders’ equity NC

(4) book value per share of common stock NC

(5) retained earnings. NC

B. Wrote off account receivable.  

(1) the current ratio  -

(2) working capital -

(3) stockholders’ equity -

(4) book value per share of common stock NC

(5) retained earnings. -

C. Converted a short-term note payable to a long-term note payable.

(1) the current ratio +

(2) working capital +

(3) stockholders’ equity NC

(4) book value per share of common stock NC

(5) retained earnings. NC

D. Purchased inventory on account.

(1) the current ratio -

(2) working capital NC

(3) stockholders’ equity NC

(4) book value per share of common stock NC

(5) retained earnings. NC

E. Declared cash dividend.

(1) the current ratio -

(2) working capital -

(3) stockholders’ equity -

(4) book value per share of common stock NC

(5) retained earnings. NC (at declaration it will change after year end adjustment)

F. Sold merchandise on account at a profit.

(1) the current ratio +

(2) working capital +

(3) stockholders’ equity +

(4) book value per share of common stock NC

(5) retained earnings. +

G. Issued stock dividend.

(1) the current ratio NC

(2) working capital NC

(3) stockholders’ equity NC

(4) book value per share of common stock NC

(5) retained earnings. -

H. Paid account payable.

(1) the current ratio +

(2) working capital NC

(3) stockholders’ equity NC

(4) book value per share of common stock NC

(5) retained earnings. NC

I. Sold building at a loss.

(1) the current ratio NC

(2) working capital +

(3) stockholders’ equity -

(4) book value per share of common stock NC

(5) retained earnings. -

Explanation:

A.

Collection of account receivable will increase the cash and decrease the account receivable both of these are current asset.

B.

Writer off account receivable will reduce the account receivable balance which is a current asset and increase the expenses which ultimately reduce the retained earnings.

C.

It will decrease the current liabilities and increase long term liability

D.

It will increase the inventory as current asset and account payable as current liabilities.

E.

It will decrease the total stockholders equity as a contra equity account of dividend and increase the current liabilities as Dividend payable.

F.

It will increase the cash / account receivable more than the decrease in inventory value.

G.

Stock dividend will have no net impact on stockholders equity. Because it will increase the common stock and add-in-capital excess of par accounts and decrease the retained earning accounts all of these are equity accounts.

H.

It will decrease account payable as current liabilities and cash as current assets.

I.

Cash will increase the current assets and Sale of asset decrease the net fixed asset value. Loss will decrease the retained earning in the form of net income value.

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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