The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017:$\begin{array}{lrr}&2018&2017\
\text { Current assets } & \$ 6,000 & \$ 3,000 \
\text { Long-term assets } & 7,000 & 4,000 \
\text { Current liabilities } & 2,000 & 3,000 \
\text { Long-term liabilities } & 7,000 & 0 \
\text { Stockhol ders' equity } & 4,000 & 4,000
\end{array}$ Between 2017 and 2018,

A)The Piano Company's debt-to-equity ratio and current ratio both increased.
B)The Piano Company's debt-to-equity ratio and current ratio both decreased.
C)The Piano Company's debt-to-equity ratio increased,and its debt-to-total assets ratio decreased.
D)The Piano Company's debt-to-equity ratio decreased,and its debt-to-total assets ratio increased.

Question

The following items appear on the balance sheet of The Piano Company at the end of 2018 and 2017:$\begin{array}{lrr}&2018&2017\
\text { Current assets } & \$ 6,000 & \$ 3,000 \
\text { Long-term assets } & 7,000 & 4,000 \
\text { Current liabilities } & 2,000 & 3,000 \
\text { Long-term liabilities } & 7,000 & 0 \
\text { Stockhol ders' equity } & 4,000 & 4,000
\end{array}$ Between 2017 and 2018,

A)The Piano Company's debt-to-equity ratio and current ratio both increased.
B)The Piano Company's debt-to-equity ratio and current ratio both decreased.
C)The Piano Company's debt-to-equity ratio increased,and its debt-to-total assets ratio decreased.
D)The Piano Company's debt-to-equity ratio decreased,and its debt-to-total assets ratio increased.

Quizplus · Accepted Answer

The debt-to-equity ratio increased because long-term liabilities increased from 0 to 7,000 while stockholders' equity remained the same, indicating more debt relative to equity. The current ratio also increased from 1 (3,000/3,000) in 2017 to 3 (6,000/2,000) in 2018, indicating an improved ability to cover short-term obligations with short-term assets.

The Following Items Appear on the Balance Sheet of the Piano