Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?
A) The company's current ratio increased.
B) The company's times-interest-earned ratio decreased.
C) The company's basic earning power ratio increased.
D) The company's equity multiplier increased.

Question

Quizplus · Accepted Answer

Paying off short-term notes payable with the proceeds from issuing new common stock would reduce the company's liabilities and increase its equity, which would increase the current ratio (current assets/current liabilities). However, it would have no effect on the company's times-interest-earned ratio (which measures the company's ability to meet its interest payments), basic earning power ratio (which measures the company's ability to generate earnings from its total assets), or equity multiplier (which measures the company's financial leverage or how much debt is used to finance assets).

Casey Communications Recently Issued New Common Stock and Used the Proceeds