Where There Are Debt Covenants in Place to Restrict the Level

question 18

Multiple Choice

Where there are debt covenants in place to restrict the level of debt to assets then management may be motivated to:

• A) avoid revaluations because an increase in asset values increases depreciation and therefore reduces profit.
• B) undertake revaluations where the expectation is that asset values have fallen.
• C) avoid revaluations because of their effect on the cash flows of the business and therefore its ability to pay interest under the debt covenant.
• D) undertake revaluations where the expectation is that asset values are rising.

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Definitions:

Responsibility Centres

Divisions or departments within an organization, each managed by a supervisor who is responsible for its performance and costs.

Profit and Loss Statements

Financial documents that summarize revenues, costs, and expenses incurred during a specific period to show a company's net income or loss.

Organisation

An entity comprising multiple people, such as an institution, association, or business, working together to achieve a common goal or set of objectives.

Self-Managed Teams

Groups of employees who collectively assume responsibility for organizing, controlling, and supervising their own work activities.