Rio Imports
Information from the Financial Statements Is Provided in the Following

question 212

Multiple Choice

Rio Imports
Information from the financial statements is provided in the following table:
$\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\\\text { Current liabilities } & \$ 460,000 & \$ 320,000 \\\text { Long-term liabilities } & 240,000 & 640,000 \\\text { Shareholders' equity } & 840,000 & 1,080,000 \\\text { Net cash flows from operating activities } & 160,000 & 102,000 \\\text { Interest and principal payments } & 24,000 & 16,000 \\\text { Net sales } & 950,000 & 900,000 \\\text { Net income } & 180,000 & 144,000 \\\text { Interest expense } & 17,000 & 23,000 \\\text { Income taxes } & 32,000 & 29,000 \\\text { Dividends paid to common shareholders } & 30,000 & 60,000\end{array}$
-Refer to the figure Rio Imports.Which of the following can be said of the debt-to-equity ratio for Year 2?

• A) It indicates that the company's ability to meet current interest payments to creditors is increasing.
• B) It increased slightly from Year 1 to year 2.
• C) It indicates that for every $1 of capital that has been provided by shareholders, creditors provided $0.83.
• D) It indicates that the company's reliance on shareholders for funding increased from Year 1 to Year 2.

---

Definitions:

Partnership

An unincorporated business form consisting of two or more persons conducting business as co-owners for profit.

Corporation

A legal entity that is separate and distinct from its owners, who are shareholders; it has its own rights, privileges, and liabilities independent of its shareholders.

American Red Cross

A humanitarian organization that provides emergency assistance, disaster relief, and education inside the United States.

Accounting Records

Documents and books that keep track of all financial transactions of an entity.