Accounting-for-Decision-Makers Exam Dumps : WGU Accounting for Decision Makers C213 VAC2

The correct answer is B. The company has 1.5% more total liabilities than total assets . The debt ratio is calculated as:

Debt ratio = Total liabilities / Total assets

If the debt ratio is 101.5% , or 1.015 , that means total liabilities are 101.5% of total assets . In other words, liabilities are slightly greater than assets. Specifically, the company has 1.5% more liabilities than assets .

This is an important financial warning sign because it suggests the company may have negative equity . Since the accounting equation is:

Assets = Liabilities + Owners’ equity

if liabilities exceed assets, then owners’ equity must be negative. That can indicate financial distress, accumulated losses, or a highly leveraged position.

Option A is incorrect because the debt ratio does not compare liabilities to sales. Option C is incorrect because it does not compare liabilities to net income. Option D is incorrect because the debt ratio uses total liabilities and total assets , not current liabilities and current assets. Therefore, the only correct interpretation of a 101.5% debt ratio is that total liabilities exceed total assets by 1.5% , making Option B correct.

The correct answer is B. Easy to reconcile between net income and cash flows . Under the indirect method , the operating section of the statement of cash flows begins with net income and then adjusts for noncash items, gains and losses, and changes in working capital to arrive at net cash provided by operating activities . This makes it especially useful for showing the relationship between accrual-based profit and actual operating cash flow. FASB guidance explains that the indirect method presents this reconciliation within the cash flow reporting process, and OpenStax likewise describes the indirect method as beginning with net income and reconciling it to cash flows.

Option A is incorrect because the direct method is often easier for beginners to read since it lists cash receipts and cash payments more directly. Option C is incorrect because the indirect method does not specifically prevent errors or reveal “indirect costs.” Option D is incorrect because the purpose of the method is not to compare direct and indirect costs. Its main practical advantage is the clear reconciliation from net income to operating cash flow , so Option B is correct.

The correct answers are C. Interest income and D. Gain on sale of assets . Net income increases when revenues and gains increase, while it decreases when expenses and losses increase. Interest income is a type of revenue or other income that adds to earnings. Gain on sale of assets also increases net income because it represents the amount by which proceeds from the sale exceed the asset’s carrying value. OpenStax notes that the income statement includes revenues, expenses, gains, and losses in measuring financial performance.

Option A. Income tax expense decreases net income because it is an expense. Option B. Cost of sales also decreases net income because it is a major operating expense deducted in arriving at gross profit and ultimately net income. Gains and interest income improve profitability, whereas expenses reduce it. This distinction is fundamental in preparing and interpreting the income statement. Therefore, the two items that increase net income are Interest income and Gain on sale of assets , making C and D the correct answers.