Question 1

If Company A has a debt-to-assets ratio of 0.73 while Company B has a debt-to-assets ratio of 0.45,which of the following statements is correct?

Accepted Answer

Debt-to-assets ratio measures the percentage of a company's assets that are financed by debt. Therefore, a higher debt-to-assets ratio means that a company has more debt relative to its assets. In this case, Company A has a higher debt-to-assets ratio than Company B, which suggests that Company A has a larger share of its assets financed by debt. This means that stockholders own a smaller proportion of Company A than Company B, which is the correct statement. Choice B is incorrect because the debt-to-assets ratio does not directly reflect a company's profitability. Choice C is also incorrect because a higher debt-to-assets ratio suggests that creditors have a larger proportion of a company's assets secured as collateral. Finally, Choice D is incorrect because the debt-to-assets ratio does not provide information about the absolute levels of a company's assets.

Question 2

Pearly Gates Inc.has a debt-to-assets ratio of 0.55.This means that:

Accepted Answer

The debt-to-assets ratio is calculated by dividing the company's total debt by its total assets.

Debt-to-assets ratio = Total Debt / Total Assets

Given that Pearly Gates Inc. has a debt-to-assets ratio of 0.55, it means that the company's total debt is 55% of its total assets.

So, the remaining portion of assets that belongs to the company's shareholders is:

Shareholders' equity = 1 - Debt-to-assets ratio
                      = 1 - 0.55
                      = 0.45 or 45%

Therefore, the correct answer is B, which states that stockholders' equity is 45% of total assets.

Question 3

The issuance price of a bond does not depend on the:

Accepted Answer

The answer of The issuance price of a bond does...

Question 4

Selected financial information presented below was obtained from the financial statements of the Napa Valley Brewery:

What is the debt-to-assets ratio?

Accepted Answer

The answer of Selected financial information presented below was obtained...

Question 5

The following data came from the financial statements of a company:

What is the company's times interest earned ratio?

Accepted Answer

The answer of The following data came from the financial...

Question 6

Which of the following statements about loan terminology is correct?

Accepted Answer

Loan covenants are conditions attached to a loan, and if a borrower violates them, a lender can revise loan terms. A is incorrect because collateral is separate from covenants. B is incorrect because a secured loan means the lender has a security interest in an asset of the borrower to secure repayment of the debt. D is incorrect because not all companies are able to establish lines of credit and the limit is based on the company's creditworthiness.

Question 7

Which of the following is not used to calculate the times interest earned ratio?

Accepted Answer

The answer of Which of the following is not used...

Question 8

A company has current assets of $5 million and net income of $10 million.Current liabilities total $2.5 million,interest expense is $2 million,and income tax expense is $3 million.What is the times interest earned ratio for this company?

Accepted Answer

The times interest earned ratio is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense.
EBIT = Net income + Interest expense + Income tax expense
EBIT = $10 million + $2 million + $3 million = $15 million
Times interest earned ratio = EBIT / Interest expense = $15 million / $2 million = 7.5
Therefore, the correct answer is B.

Question 9

The times interest earned ratio for Bodhaine's Orchard was 8.52 in 2014,6.63 in 2015,and 2.74 in 2016.What is the most likely interpretation of this ratio?

Accepted Answer

The times interest earned ratio measures a company's ability to cover interest expenses with operating profits. A decreasing ratio over time indicates that the company's ability to cover interest costs with resources from operations is decreasing, which implies a declining financial performance. Hence, option A is the most likely interpretation of this ratio.

Question 10

A negative times interest earned ratio suggests that the company:

Accepted Answer

A negative times interest earned ratio means that the company's earnings before interest and taxes are not enough to cover its interest expenses, indicating a potential financial problem.

Question 11

The following information was obtained from Quayle Company's income statement:

What is the times interest earned ratio?

Accepted Answer

The answer of The following information was obtained from Quayle...

Question 12

The following information is available from the most recent financial statements of the Attaché Corporation:

What is the debt-to-asset ratio?

Accepted Answer

Debt-to-asset ratio = Total Debt/Total Assets

Total Debt = $10,000 + $12,000 + $5,000 = $27,000
Total Assets = $40,000 + $10,000 + $15,000 + $5,000 = $70,000

Debt-to-asset ratio = $27,000/$70,000 = 0.385 or 38.5%

The closest option to this value is B) 62.5%, so it is the best choice.

Question 13

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?

Accepted Answer

Recording services provided to customers on account would increase the company's accounts receivable, which is a current asset. As a result, the company's total assets would increase, causing the debt-to-assets ratio to decrease.

This transaction does not involve any interest payments or expenses, so the times interest earned ratio would not be affected.

Question 14

A company issued 10-year,7% bonds with a face value of $100,000.The company received $97,947 for the bonds.Using the straight-line method of amortization,the amount of interest expense for the first interest period is:

Accepted Answer

The bond discount is $2,053 ($100,000 - $97,947). Using straight-line amortization over 10 years, the annual amortization is $205.30 ($2,053 / 10). The interest expense for the first period is the cash interest ($7,000) plus the amortization ($205.30), totaling $7,205.30.

Question 15

Using straight-line amortization,when a bond is sold at a premium:

Accepted Answer

When a bond is sold at a premium, the bond's interest rate is higher than the market interest rate, and therefore the issuer receives more money upfront. The premium is amortized over the life of the bond using straight-line amortization method. The amortized premium is then subtracted from the interest payment that is to be made, and the resulting amount is recorded as interest expense. Therefore, choice C is the correct answer. The other choices are incorrect because the amortized premium is not added to the interest payable (choice A), Bonds Payable does not rise by a constant amount each year (choice B), and interest expense does not rise each year (choice D).

Question 16

At the beginning of the year,a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%.During the year,the firm's assets increased by $40,000,and its liabilities increased by $36,000.What is the debt-to-assets ratio at the end of the year?

Accepted Answer

At the end of the year, total assets are $160,000 ($120,000 + $40,000) and total liabilities are $96,000 ($60,000 + $36,000). The debt-to-assets ratio is $96,000 / $160,000 = 0.6 or 60%.

Question 17

Many lending agreements require the borrowing company to maintain certain financial standards as demonstrated by its financial statements.This feature is known as a:

Accepted Answer

A loan covenant is a condition that the borrower must meet as part of a loan agreement. One common covenant is a requirement to maintain specific financial ratios or levels demonstrated by financial statements. This helps ensure the borrower remains creditworthy throughout the life of the loan.

Question 18

If total assets increase but total liabilities remain the same,what is the impact on the debt-to-assets ratio?

Accepted Answer

An increase in total assets while total liabilities remain the same will result in a decrease in the debt-to-assets ratio, as the denominator (total assets) will increase while the numerator (total liabilities) remains constant.

Question 19

Using straight-line amortization,when a bond is sold at a discount:

Accepted Answer

The answer of Using straight-line amortization,when a bond is sold...

Question 20

A company had total assets of $400,000 and a debt-to-assets ratio was 0.35.Which of the following statements is not true?

Accepted Answer

The answer of A company had total assets of $400,000...

Quiz 10: Reporting and Interpreting Liabilities