Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, manage

Question

Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, management at Tornado determines that it will need to replace some machinery four years from now [on December 31, 2014], and which it estimates will cost $160,000 on that date. Management decides to have $160,000 available on December 31, 2014 by making 4 equal annual deposits into a fund at its bank each December 31. It is estimated that the interest rate the deposits will earn is 7% compounded annually.

Assume that each annual deposit to be made is $35,000.

Which one of the following statements is correct about the effect the deposit [e.g. $35,000] made on December 31, 2011 had in 2011 (at December 31, 2011)?

A. decreased current assets
B. decreased the asset turnover ratio [net sales/ave. total assets]
C. increased the gross profit margin ratio
D. increased the debt-to-assets ratio

Explanation / Answer

The amount invested will decrease the cash (current assets) and will increase Investments (long term). Hence it will decrease the current assets. A. decreased current assets

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