on ratio behaviors the options are

decrease

increase

no change

Fresno Furniture Manufacturing Inc.'s Pretransaction Statement of Financial Performance 12. The effect of transactions on ratios You've been asked to tutor Adaira, a finance student who doesn't feel comfortable about her 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 Adaira to complete. The purpose of these exercises is to help Adaira (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 financlal 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 financal statements and ratios, assume that the following balance sheet and income statement reflect the company's pretransaction condition and performance. 1 Cost of goods sold equals 40% of sales. 2 Interest expense equals 6% of the combined notes payable and long-term debt balances. 3 The average federal and state tax rate is 35%. Business Transaction 2 A $500,00010-year bank loan is initiated, and the funds are placed in Fresno Furniture Manufacturing Inc. (FFM)'s checking account. \begin{tabular}{|llll} \hline Inventory & 500,000 & Notes payable & \\ \hline Prepaid expenses & 5,000 & Total current liabilities & 100,000 \\ \hline Total current assets & $1,000,000 & Long-term debt & 500,000 \\ \hline Gross plant and equipment & $1,500,000 & Common stock & $600,000 \\ \hline Accumulated depreciation & 500,000 & Capital paid in excess of par & 350,000 \\ \hline Net plant and equipment & $1,000,000 & Retained earnings & 900,000 \\ \hline Total assets & & Total equity & $1,400,000 \\ \hline \end{tabular} Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transactian occurs exactly as stated without interprebing it further. Do not consider any related transactions that may occur before or after the specifed transaction.) Business Transaction 1 Fresno Furniture Manufacturing inc. (FFM) purchases a new piece of equipment for $50,000, using a cash down payment of $5,000 and a note payable for the outstanding balance