During the year,the company recorded services provided to customers on account.What effect will this transaction have on the debt-to-assets and times interest earned ratios?
A)The debt-to-assets ratio will decrease and the times interest earned will increase.
B)The debt-to-assets ratio will increase and the times interest earned will not change.
C)Both ratios will decrease.
D)Both ratios will increase.

Question

Quizplus · Accepted Answer

Debt-to-assets ratio = Total liabilities ÷ Total assets
Times interest earned = (Net income + Interest expense + Income tax expense)÷ Income tax expense
This transaction will cause Accounts Receivable,an asset,to increase and,since total assets are in the denominator,the debt-to-assets ratio will decrease.This transaction will also cause Service Revenue and net income to increase and,since net income is in the numerator,the times interest earned ratio will increase.

During the Year,the Company Recorded Services Provided to Customers on Account.What