A company failed to make an accrual adjustment for interest owed on a short-term bank loan.Which of the following statements is true about how this will affect the financial ratios?
A)Net profit margin ratio will be understated and debt-to-assets ratio will be overstated.
B)Net profit margin ratio and debt-to-assets ratios will be unaffected.
C)Net profit margin ratio will be overstated and debt-to-assets ratio will be understated.
D)Net profit margin ratio will be unaffected and debt-to-assets ratio will be overstated.

Question

Quizplus · Accepted Answer

Failing to accrue interest expense will overstate net income, thus overstating the net profit margin. It will also understate liabilities, leading to an understated debt-to-assets ratio.

A Company Failed to Make an Accrual Adjustment for Interest