Leiminster Co.is analyzing the solvency of Acme Manufacturing and has collected the following data: $\begin{array}{llll}
& \mathbf{2 0 1 5} & \mathbf{2 0 1 4} & \mathbf{2 0 1 3} \
\text { Total debt } & \$ 2,000 & \$ 1,900 & \$ 1,750 \
\text { Total equity } & \$ 4,000 & \$ 4,500 & \$ 5,000
\end{array}$ What would be a reasonable explanation of these financial results?
A)The decline in the company's equity results from a decline in the market value of the company's common shares.
B)The increase of $250 in the company's debt from 2013 to 2015 indicates that lenders are viewing the company as increasingly creditworthy.
C)The decline in the company's equity indicates that the company may be incurring losses on its operations, paying dividends greater than income, or repurchasing shares.
D)The increase of $250 in the company's debt from 2013 to 2015 indicates that the company is generating low level of cash and needs to borrow.

Question

Leiminster Co.is analyzing the solvency of Acme Manufacturing and has collected the following data: $\begin{array}{llll} 
& \mathbf{2 0 1 5} & \mathbf{2 0 1 4} & \mathbf{2 0 1 3} \
\text { Total debt } & \$ 2,000 & \$ 1,900 & \$ 1,750 \
\text { Total equity } & \$ 4,000 & \$ 4,500 & \$ 5,000
\end{array}$ What would be a reasonable explanation of these financial results?
A)The decline in the company's equity results from a decline in the market value of the company's common shares.
B)The increase of $250 in the company's debt from 2013 to 2015 indicates that lenders are viewing the company as increasingly creditworthy.
C)The decline in the company's equity indicates that the company may be incurring losses on its operations, paying dividends greater than income, or repurchasing shares.
D)The increase of $250 in the company's debt from 2013 to 2015 indicates that the company is generating low level of cash and needs to borrow.

Quizplus · Accepted Answer

The decline in equity from $5,000 in 2013 to $4,000 in 2015 suggests the company might be experiencing operational losses, paying dividends that exceed its income, or repurchasing its shares, as these are common reasons for a reduction in equity.

Leiminster Co What Would Be a Reasonable Explanation of These Financial Results