Can anyone help me understand this basic concept on Ratios:

“…since the ratio is less than one, the percentage change of the numerator is greater than the percentage change of the denominator, so the ratio will increase…” -this come from the below question

What would be the impact on a firm’s return on assets ratio (ROA) of the following independent transactions, assuming ROA is less than one?

Transaction #1 – A firm owned investment securities that were classified as available-for-sale and there was a recent decrease in the fair value of these securities.

Transaction #2 – A firm owned investment securities that were classified as trading securities and there was recent increase in the fair value of the securities.

Transaction #1 Transaction #2

A) Higher Higher B) Higher Lower C) Lower Higher

Your answer: B was incorrect. The correct answer was A) Higher Higher

Available-for-sale securities are reported on the balance sheet at fair value and any unrealized gains and losses bypass the income statement and are reported as an adjustment to equity. Thus, a decrease in fair value will result in a higher ROA ratio (lower assets). Trading securities are also reported on the balance sheet at fair value; however, the unrealized gains and losses are recognized in the income statement. Therefore, an increase in fair value will result in higher ROA. In this case, both the numerator and denominator are higher; however, since the ratio is less than one, the percentage change of the numerator is greater than the percentage change of the denominator, so the ratio will increase.