ADMS 2500 Chapter Notes -Inventory Turnover, Cae Inc., Business Communication
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ADMS 2500 Full Course Notes
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Note: keep the balance sheet equation in mind when doing these types of problems. Equity = assets ( by the same amount as liabilities) liabilities ( by the same amount as assets) So no change in equity, but and increase in total debt causes an increase in the ratio. Equity = assets - liabilities: purchases land for cash has no affect on ratio, because an asset increases (land) and an asset decreases (cash) by the same amount, so no affect on equity and the debt/equity ratio. Equity = assets ( and by the same amount) liabilities. So no change in the equation and no affect on the ratio: issues stock for cash will decrease the ratio, because issuing stock will increase an asset (cash) and increase and equity account (stock). This has no affect on total debt, but increases equity, thus causing a decrease in the debt/equity ratio.