Question 1: State whether the following transactions increase, decrease or have no effect on the corresponding ratio.

Transaction                                            Ratio Effect

a. Sold goods on credit                      Current ratio                                                             

b. Sold goods on credit                      Cash flow from operation ratio                   

c. Sold Goods on credit                      Acid Test Ratio

d. Paid supplies money owed          Current Ratio

e. Issued Debt                                        Return on Owners Equity  

f. Bought a machine in cash             Current Ratio

g. Repurchased shares                       Return on total assets

h. Share price falls 10%                      P/E Ratio

Question 2: 2. A company has experienced an increase in ROA and a fall in ROE. What is a likely cause of this?

3.

Financial statement analysis reveals the following information:

Comapany A:

Interest Coverage Ratio: 1.2
Current Ratio: 5.2
Gearing Ratio: 0.6
Acid Test: 4.5

Company B:

Interest coverage ratio: 4.6
Current ratio: 1.4
Gearing Ratio: 0.2
Acid Test: 0.8

Which company has the better liquidity? Which company has long term financial risk?

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