Effect of transactions on various financial ratios Indicate the effect that eachtransaction/event listed here will have on the financial ratio listed opposite it, andprovide an explanation for your answer. Use 1 for increase, − for decrease, and (NE)for no effect. Assume that current assets exceed current liabilities in all cases, bothbefore and after the transaction/event.Transaction/Event Financial Ratioa. Purchased inventory on account.b. Sold inventory for cash, at a profi t.c. Issued a 10% stock dividend.d. Issued common stock for cash.e. Sold land at a gain.f. Purchased treasury stock for cash.g. Accrued interest on a note payable.h. Accrued wages that have been earnedby employees.i. Purchased equipment for cash.j. Issued bonds at an interest rate that isless than the company’s ROI.Number of days’ sales in inventoryInventory turnoverEarnings per shareDebt ratioReturn on investmentDebt/equity ratioTimes interest earnedCurrent ratioPlant and equipment turnoverReturn on equity
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Effect of transactions on various financial ratios Indicate the effect that each
transaction/event listed here will have on the financial ratio listed opposite it, and
provide an explanation for your answer. Use 1 for increase, − for decrease, and (NE)
for no effect. Assume that current assets exceed current liabilities in all cases, both
before and after the transaction/event.
Transaction/Event Financial Ratio
a. Purchased inventory on account.
b. Sold inventory for cash, at a profi t.
c. Issued a 10% stock dividend.
d. Issued common stock for cash.
e. Sold land at a gain.
f. Purchased
g. Accrued interest on a note payable.
h. Accrued wages that have been earned
by employees.
i. Purchased equipment for cash.
j. Issued bonds at an interest rate that is
less than the company’s ROI.
Number of days’ sales in inventory
Inventory turnover
Earnings per share
Debt ratio
Debt/equity ratio
Times interest earned
Plant and equipment turnover
Return on equity
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