Question

(Effect of Transactions on Financial Statements and Ratios) The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock (\(100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was \)151.53.

Each numbered transaction on the next page is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2018 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement.

For each of the numbered transactions you are to decide whether it:

1. Increased the corporation’s 2018 net income.
2. Decreased the corporation’s 2018 net income.
3. Increased the corporation’s total retained earnings directly (i.e., not via net income).
4. Decreased the corporation’s total retained earnings directly.
5. Increased the corporation’s current ratio.
6. Decreased the corporation’s current ratio.
7. Increased each stockholder’s proportionate share of total stockholders’ equity.
8. Decreased each stockholder’s proportionate share of total stockholders’ equity.
9. Increased each stockholder’s equity per share of stock (book value).
10. Decreased each stockholder’s equity per share of stock (book value).
11. Had none of the foregoing effects.

Instructions

List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s).

Transactions

8) The corporation received a check for the proceeds of an insurance policy from the company with which it is insured against theft of trucks. No entries concerning the theft had been made previously, and the proceeds reduce but do not cover completely the loss.

Short answer

The transaction includes (b), (e), and (j).

Step-by-step solution

Meaning of Current Ratio

The current ratio is the ratio that determines the efficiency of a business. The current ratio is one of the most helpful liquidity ratios in financial analysis since it allows for to assessment of a company's liquidity situation.

Mentioning the effect of the transaction

The following transaction should be included for the above effect

1. Decreased the corporation’s 2018 net income.
2. Increased the corporation’s current ratio.
3. Decreased each stockholder’s equity per share of stock (book value).