Question 1

Marcy wants to expand her catering business.However,she was raised to avoid debt at all costs and prefers to have cash in hand before buying anything.She has $15,000 in cash available for expansion,but the total estimated cost of the expansion is $100,000.Explain to Marcy the advantages and disadvantages using a long-term note payable to finance the expansion.

Accepted Answer

The answer of Marcy wants to expand her catering business.However,she...

Question 2

Lockwood Corporation had $1,523,000 in total assets,$758,000 in total liabilities,and $765,000 in stockholders' equity.Interest expense for the period was $151,350.Income from operations was $380,750.Calculate the debt-to-equity ratio.Round your answer to the nearest tenth of a percent.

Accepted Answer

The answer of Lockwood Corporation had $1,523,000 in total assets,$758,000...

Question 3

Which financial statement(s)do you need to use to calculate the debt-to-equity ratio?

Accepted Answer

The debt-to-equity ratio is calculated using the balance sheet, as it compares total liabilities to shareholders' equity, both of which are found on the balance sheet.

Question 4

When company's debt-to-equity ratio is greater than 100% than its current ratio must be greater than 1.0 to 1.

Accepted Answer

The two ratios are not directly related in this way. A company's debt-to-equity ratio compares its liabilities to its equity, while the current ratio compares its current assets to its current liabilities. A company's debt-to-equity ratio can be greater than 100% and still have a current ratio below 1.0 to 1.0 if it has more long-term debt than short-term assets.

Question 5

Financial leverage ________.

Accepted Answer

Financial leverage refers to using borrowed money to increase earnings. It can be beneficial for companies, but it also increases the risk. It is not risk-free and has nothing to do with negotiating ability.

Question 6

If a company earns more with the money it borrows than it has to pay to borrow that money,it has positive financial leverage.

Accepted Answer

Positive financial leverage is when a company earns a higher return on the investments made with borrowed funds than the cost of borrowing those funds. This results in an increase in the company's profitability and shareholder value.

Question 7

The debt-to-equity ratio ________.

Accepted Answer

The debt-to-equity ratio compares the amount of creditors' claims to the assets of the firm with owners' claims to the assets of the firm. This ratio indicates the extent to which a company is leveraged and the level of risk associated with its financing structure.

Question 8

Team Shirts has current assets of $162,348; total assets of $210,837; current liabilities of $86,941; total liabilities of $101,745; and shareholders' equity of $109,092.Calculate the debt-to-equity ratio.

Accepted Answer

Debt-to-equity ratio = Total liabilities/Shareholders' equity
= $101,745/$109,092
= 0.93 or 93%

Question 9

The debt-to-equity ratio is calculated by dividing shareholders' equity by total liabilities.

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by shareholders' equity.

Question 10

Tarnisha Smith is pleased with the performance of her business,Out of Africa.She is thinking about borrowing money to expand her business.Before she does that,she wants to learn more about using financial statements to analyze the impact of debt on her business.Explain to Tarnisha what information about liabilities is found in each financial statement.Then explain to Tarnisha how the debt-to-equity is used to evaluate companies.

Accepted Answer

The answer of Tarnisha Smith is pleased with the performance...

Question 11

Merryworth,Inc.had $2,000,000 in total assets,of which $600,000 are current assets,and $1,200,000 in total liabilities,of which $400,000 are current liabilities.Calculate the debt-to-equity ratio.Round your answer to the nearest whole percent.

Accepted Answer

The answer of Merryworth,Inc.had $2,000,000 in total assets,of which $600,000...

Question 12

Doolitte & Daley,Inc.has current assets of $100,000; total assets of $300,000; current liabilities of $80,000; total liabilities of $180,000; and shareholders' equity of $120,000.Calculate the debt-to-equity ratio.

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by shareholders' equity. Here, it is $180,000 / $120,000 = 1.5, which is equivalent to 150%.

Question 13

If a company earns more with the money it borrows than it has to pay to borrow that money,it is called ________.

Accepted Answer

This is known as positive financial leverage, as the company is earning more with the borrowed money than it has to pay to borrow that money. This can be a beneficial strategy for companies looking to increase their profits, but it also comes with the risk of increased debt and interest payments if the investments don't yield the expected returns.

Question 14

Maxine's Equipment Company had $400,000 in total assets,$275,000 in total liabilities,and $125,000 in shareholders' equity.Interest expense for the period was $15,050.Income from operations was $80,000.Calculate the debt-to-equity ratio.Round your answer to the nearest percentage.

Accepted Answer

The answer of Maxine's Equipment Company had $400,000 in total...

Question 15

Team instructions: Provide students with copies of the financial statements for Team Shirts for June and July.Divide the class into teams of three or four people.Give the students time in class to answer the following questions.Each team should turn in only one copy of the answers for grading.All team members will receive the same grade.

Accepted Answer

The answer of Team instructions: Provide students with copies of...

Question 16

The primary risk associated with long-term debt is the risk of ________.

Accepted Answer

The answer of The primary risk associated with long-term debt...

Question 17

Risks associated with debt affect both a company and its creditors.

Accepted Answer

The answer of Risks associated with debt affect both a...

Question 18

Z Best,Inc.sold a 5-year,$1,000,zero-interest bond for $497.18 when the market rate of interest was 15%.The total cost of borrowing $497.18 is ________.

Accepted Answer

The answer of Z Best,Inc.sold a 5-year,$1,000,zero-interest bond for $497.18...

Question 19

Ken's Kandy prepared the following preliminary balance sheet a few days before its December 31 yearend:
Ken is concerned about the size of the accounts payable in relation to the company's cash and other current assets.He asks the accountant to reclassify $3,000 of the accounts payable as long-term notes payable before releasing the annual report on December 31.
a.What is the company's current ratio now,based on the preliminary balance sheet?
The formula for calculating the current ratio is current assets / current liabilities.
b.What will the company's current ratio be if $3,000 of the accounts payable are reclassified as long-term notes payable?
c.Will reclassifying the accounts payable have any effect on the debt-to-equity ratio? Explain.
d.Is it ethical to reclassify current liabilities as long-term liabilities,as long as total liabilities are correct?

Accepted Answer

The answer of Ken's Kandy prepared the following preliminary balance...

Question 20

Discounting means ________.

Accepted Answer

The answer of Discounting means ________.
...

Quiz 7: Accounting for Liabilities