Tire Co. Finance Assingment Help With Solution

Tire Co. Finance Assingment Help With Solution

Exercise 3-20

The only method to ascertain the answers to these ratio questions, other
than guessing is to calculate the effect on the ratio.

I have set up the following values that will be used to calculate the ratios:
Trial Balance
Cash 2000
Accounts receivable 2000
Investments 2500
Prepaids 3000
Inventories 4000
Equipment 2500
Current liabilities 2000
Total liabilities 10000
Total shareholders equity 20000


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Below, I place the ratio formula in each cell. Note that I place a $ before the column letter and
a $ before the row number. This is so the formula will not change when I copy the formula down to the
other actions.
I review the action and ascertain what accounts would be affected by the action, and then
I the change the amounts above in the trial balance to ascertain the effect of the “action” on the ratio

For example: Issuance of long term bonds will increase cash and increase long term liabilities.
I will change cash from 1000 to 2000 and total liabilities from 9000 to 10,000
When you change cash and total liabilities, the current ratio changes from 6.25 to 6.75 it increased
The Acid test ratio changed from 2.75 to 3.25, it increased.
The Debt to Equity ratio changed from .45 to to .5, it increased.

Action Current Ratio I/D/No effect Acid Test Ratio I/D/No effect Debt to Equity Ratio I/D/No effect
Issuance of long term bonds 6.75 I 3.25 I 0.5 No effect
Issuance of short term notes
Payment of accounts payable
Purchase of inventory on account
Purchase of inventory for cash
Purchase of equipment with a four year note
Retirement of bonds
Sale og common stock
Write off of obsolete inventory
Purchase of short term investment for cash
Decision to refinance on a long term basis
some currently maturing debt



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