Consider the debt ratio. Which of the following activities will decrease the debt ratio? a. purchasing...

Consider the debt ratio. Which of the following activities will decrease the debt ratio? a. purchasing treasury stock with cash b. selling common stock for cash c. selling inventory for cash d. purchasing inventory with cash

Expert Solution

Debt ratio = Total debt / Total assets

To decrease debt ratio, Total assets should increase or Total debt should decrease

Purchasing treasury stock decreases total stockholder equity and Decreases cash. Decreasing cash decreases total assets, So, debt ratio increases. So, 'a' is Incorrect

Selling common stock for cash, Increases Cash and increases total stockholder's equity, where increase in cash increases Total assets. So, 'b' is Correct

Selling Inventory for cash, doesn't impact the total assets because cash is realized from inventory. where decrease in Inventory offset increase in Cash. So, 'C' is Incorrect

Selling Inventory for cash, doesn't impact the total assets because cash is paid to purchase inventory. where increase in Inventory offset decrease in Cash. So, 'd' is Incorrect

Option 'B' is correct

Selling common stock for cash increases total assets because cash is received from the sale of the asset. Because increase in Total assets of debt ratio decreases debt ratio.

ekkarill92 answered 1 year ago

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