A firm wants to decrease its debt-to-asset ratio without affecting its current ratio. Which of the following actions can it undertake?
Answer(s): C
Both "accounts receivable," which represents sales on credit and "salaries payable" are current accounts.Therefore, if you do not want to affect current ratio, II and III are not acceptable strategies. When old assets are sold and the proceeds used to retire outstanding bonds, the debt-to-asset ratio decreases. This is because debt/asset ratio is almost always less than 1 (we will ignore abnormal cases where book equity can go negative; e.g. the case where the firm keeps borrowing and paying out the proceeds as dividends). Hence, when both numerator and denominator are decreased, the ratio decreases. However, the current portion of the long-term debt also gets retired, increasing the current ratio. So I is also not an acceptable strategy, though at first glance it appears so. With IV, debt is unaffected but assets increase, decreasing the debt/asset ratio.
When the Percentage of Sales method is used, the estimated bad debt expense is calculated by
Answer(s): D
This method bases the period adjustment on a percent of net sales on account for the period.
The interest expense on a discount bond _______ over time.
Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a discount, the discount amount is amortized over the life of the bond. The outstanding liability thus increases steadily toward the face value. The increasing liability increases the interest expense over time.
A firm has to pay 1,000 to its suppliers in one year. The interest rate on this liability is 9%. The current liability recorded by the firm is ________.
Current liabilities, in general, are recorded at the principal portion of the payment. Hence, even though the firm in this case will have to pay 1,090 in 1 year, the current liability equals the principal portion = 1,000.
What is the purpose of information presented in notes to the financial statements?
Answer(s): A
Users of the financial information are the focus of financial reporting. GAAP requires disclosures in the notes to facilitate the users' understanding of the financial statements.
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