Which of the Following Statements Is CORRECT

question 56

Multiple Choice

Which of the following statements is CORRECT?

• A) If two firms differ only in their use of debt⎯i.e., they have identical assets, sales, operating costs, and tax rates⎯but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.
• B) If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.
• C) A firm's use of debt will have no effect on its profit margin on sales.
• D) If two firms differ only in their use of debt⎯i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates⎯but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.
• E) The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

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Definitions:

Balance Sheet Account

An account found on the balance sheet, which is one of the three principal financial statements; these accounts include assets, liabilities, and shareholders' equity.

Depreciation Expense

The portion of the cost of an asset that is allocated as an expense over its useful life, reflecting the decrease in value over time.

Overstate Assets

Reporting a company's assets at a value higher than their actual worth, which can inaccurately represent financial health.

Unearned Revenue Account

An account representing cash received for goods or services not yet provided; considered a liability until the service or product is delivered.