A company sells $200,000 in long-term bonds and buys $200,000 in inventory for cash.Which of the following statements is true?
A)The debt-to-assets ratio will stay the same and the times interest earned ratio will rise.
B)The quick ratio will rise and the times interest earned ratio will rise.
C)The debt-to-assets ratio will rise but the times interest earned ratio will fall.
D)The quick ratio will rise and the times interest earned ratio will stay the same.

Question

Quizplus · Accepted Answer

The purchase of inventory will increase the company's assets, but the issuance of long-term bonds will increase its liabilities. Therefore, the debt-to-assets ratio will rise. Additionally, since the company is taking on more debt, the times interest earned ratio will likely fall as there is now more interest that needs to be paid.

A Company Sells $200,000 in Long-Term Bonds and Buys $200,000