[Anonymous]

I came across this question on a sim and I just need help understanding why the answer is what Becker is saying it is.

The Debt to Equity decreased from Year 1 (4.61) to Year 2 (1.99). The sim has you pick a scenario that would have caused that to happen and I selected “Proceeds from sale of stock and issuance of debt were used to pay payables on a more current basis” and the correct answer is “Capital stock was issued during the year”.

I really don’t feel confident when it comes to questions like this so I just need some extra help understanding them.

[mjp44]

You really just need to know the formula the question is asking. Once you figured that out you can eliminate choices based upon the scenario increasing or decreasing the formula. In your example, the debt to equity formula is total debt/total equity. The question states the ratio decreased from one year to the next. Therefore, either total debt decreased or equity increased. “Capital stock was issued during the year” is correct answer because this would increase the company's total equity, thus decreasing the ratio.

“Proceeds from sale of stock and issuance of debt were used to pay payables on a more current basis” would not explain a decrease in the ratio because its just saying that debt/equity proceeds are paying payables faster but this doesnt affect the ratio.

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[Anonymous]

Yeah I knew the ratio and what would cause it to decrease but I for some reason was thinking that payables= debt. So in my mind, I was thinking sales of stock would cause equity to go up and paying payables meant less debt.

[kahtwoloo]

Other thing about your answer is the company also issued stock which increases equity. I would have taken that to me the debt is decreasing while the equity is increasing, thus no change in ratio. The other answer only affects one of the components of the ratio so it cuts down on some of analysis you need to do.

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[Author]

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