A Company Has Assets of $10 Million and Liabilities of $7

question 119

Multiple Choice

A company has assets of $10 million and liabilities of $7 million. Liabilities include $4 million in accounts payable, $2 million in long-term notes payable and $1 million in other non-current liabilities. If a financial web site uses long-term debt rather than total liabilities to calculate the company's debt-to-assets ratio, the web site will report a ratio of:

• A) 0.5, which would correctly state financing risk.
• B) 0.4, which would suggest more financing risk than it actually has.
• C) 0.3, which would suggest less financing risk than it actually has.
• D) 0.3, which would suggest more financing risk than it actually has.

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Definitions:

Promissory Note

A financial document in which one party promises to pay a certain sum of money to another party under agreed terms.

Promissory Note

A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.

Dishonored

Refers to a financial instrument, such as a check or promissory note, that has not been paid upon presentation because of insufficient funds or other reasons.

Interest Revenue

Income received from investments in bonds, loans, or other interest-bearing instruments, representing the compensation for lending funds or capital.