[samfutureCPAboy]

Can someone help me with this, please?

Debt to Equity Ratio for: 2005 2006

22.51 17.11

Question: “An audit finding consistent with change in debt to equity ratio is:”

A. The company was able to purchase substantial operating assets through issuance of additional long term debt.

B. The company generated profit during the year.

C. The company was able to decrease its interest expense due to changes in the market.

The answer is obviously B, but can’t the answer also be C? Since decrease in interest expense will increase SHE and as a result, decrease debt to equity ratio?

Thank you in advance!

CA Candidate

F- 68, 78 (Thank you, Lord)
A- 75 (Thank you, Lord God)
R- 72, 75 (Thank you, Lord God Almighty)
B- 74, 77 (Thank you, Lord God Almighty Forever!) DONE!!

Education - Completed
Ethics Exam - 100%
Experience - In Progress

“Faith is believing that God is going to take you places before you even get there.” - Matthew Barnett

[san4596]

Just because you decreased interest expense does not mean you increased profits. Other expenses could have increased offsetting the favorable decrease. Answer B is the most “correct” answer.

CPA EXAM: DONE!!!!
Ethics Course: Passed
Application Mailed: 3/16/15
Professional Conduct Exam: 97
Certification Date: 4/2/15!!!

[samfutureCPAboy]

Ahh ok. That clarifies it. Thanks san4596!

CA Candidate

F- 68, 78 (Thank you, Lord)
A- 75 (Thank you, Lord God)
R- 72, 75 (Thank you, Lord God Almighty)
B- 74, 77 (Thank you, Lord God Almighty Forever!) DONE!!

Education - Completed
Ethics Exam - 100%
Experience - In Progress

“Faith is believing that God is going to take you places before you even get there.” - Matthew Barnett

[hzhao0802]

still no sense to me. B indicates that net income increases by increasing profit.

however, equity consists of retained earnings which results from net income – dividend declared.

if the company declares dividends, it increase liabilities and decrease equity.

how can debt to equity ratio decrease?

FAR - 88
REG - 88
AUD - 99
BEC - 87

[NYCaccountant]

If equity went up as a result of earnings, then debt as a percentage of equity would go down.

for instance – 2005 – 30,000 in debt and 40,000 in equity = Debt to equity of .75

now 2006 – debt remains the same at 30,000 and equity increases to 45,000= debt to equity of .66

Companies do not always declare dividends, so it's not an automatic liability.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[linkman311]

I think this a great question for understanding purposes. Idk about you guys but I'm using Becker and I really wish there were more of these ratio questions to give me more practice. Does Wiley TB have more ratio questions?

Confidence is a prerequisite for success

FAR - 1/1
AUD - 1/1
BEC - 1/1
REG - Q4

Have Becker, wish I got Roger

[Author]

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