note: ratio behavior is either No Change, Increase, or Decrease

You've been asked to tutor Caleb, a finance student who doesn't feel comfortable about his understanding of the relationship between a company's business activities, its financial accounts, and the company's financial ratios. To better appreciate these relationships, you've created the following exercises for Caleb to complete. The purpose of these exercises is to help Caleb (1) understand the effect of business transactions on financial statement-such as balance sheet and income statement-accounts and (2) how these changes in the numerators and denominators of financial ratios affect the ratios' values. However, before using these exercises in your tutoring session later today, you'll want to run the calculations on the following two business transactions, to verify the accuracy of your answers. To provide a consistent frame of reference for the company's financial statements and ratios, assume that the following balance sheet and income statement reflect the company's pretransaction condition and performance. Lancashire Railway Co.'s Pretransaction Statement of Financial Condition Cash $15,000 Accounts payable $20,000 Marketable securities 10,000 Wages payable 20,000 Accounts receivable 470,000 Taxes payable 10,000 Inventory 500,000 Notes payable 50,000 Prepaid expenses 5,000 Total current liabilities 100,000 Total current assets 1,000,000 Long-term debt 500,000 Total liabilities 600,000 Gross plant and equipment 1,500,000 Common stock 150,000 Accumulated depreciation 500,000 Capital paid in excess of par 350,000 Net plant and equipment 1,000,000 Retained earnings 900,000 Total equity 1,400,000 Total assets $2,000,000 Total debt and equity $2,000,000 Business Transaction 1 Lancashire Railway Co. (Lancashire) sells $165,000 of merchandise on credit. Check if the Account Is Affected by the Specified Transaction Financial Account Inventory Accounts payable Cash Accounts receivable U Sales U Ratio's Behavior Financial Ratio Cost of goods sold Times interest earned Price-to-earnings ratio Market-to-book ratio Quick ratio Inventory turnover ratio Increases Increases Business Transaction 2 Lancashire Railway Co. (Lancashire) pays $10,000 of its federal and state taxes payable. Check if the Account Is Affected by the Specified Transaction Financial Account Taxes payable Long-term debt 0 0 Prepaid expenses Cash n Net income Ratio's Behavior Financial Ratio Average collection period Debt ratio Times interest earned Operating profit margin Return on assets Quick ratio