Question

Following are examples of errors that can be made in processing accounting data. Listed next to each error is a financial ratio.
• Recording a sales transaction twice (Gross profit percentage)
• Overstating ending inventory (Quick ratio)
• Debiting a payment of a long-term payable to a short-term payable account (Return on
assets)
• Understating the estimated useful life of a depreciable asset (Return on equity)
• Failing to prepare a year-end adjusting entry to record interest revenue (Price-earnings ratio)
• Failing to record the declaration of a cash dividend shortly before year-end (Profit margin percentage)
• Recording a purchase of a long-term asset in a current asset account (Current ratio)
Required:
(a) In general, indicate the effect on any ratio when the following happens:
(1) Numerator increases
(2) Numerator decreases
(3) Denominator increases
(4) Denominator decreases
(b) Indicate whether each error listed increases (overstates), decreases (understates), or has no impact on the financial ratio with which it is coupled.


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  • CreatedMarch 27, 2015
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