A firm began the current fiscal year with total assets of $8 million, common shares of $4 million and retained earnings of $2 million.At the end of the current year the firm reported net income of $1 million, all of which was retained by the firm.The debt-to-asset ratio for this reporting period is:
A)0.25
B)0.125
C)0.75
D)0.5

Question

Quizplus · Accepted Answer

Total assets at the beginning of the year = $8 million
Common shares = $4 million
Retained earnings = $2 million 
Total liabilities = $8 million - ($4 million + $2 million) = $2 million

Debt-to-asset ratio = Total liabilities / Total assets
= $2 million / $8 million
= 0.25

However, no debt was issued or retired during the year and all net income was retained by the firm. Therefore, there was no change in total liabilities or total assets during the year. Thus, the debt-to-asset ratio remains the same as the beginning of the year:
= $2 million / $8 million
= 0.25/2
= 0.125

A Firm Began the Current Fiscal Year with Total Assets