Student Forums CIA Part 2: Practice of Internal Auditing Section III: Performing the Engagement 50. Question ID: CMA 691 2.8 (Topic: 2D. Apply Analytical Review Techniques)

50. Question ID: CMA 691 2.8 (Topic: 2D. Apply Analytical Review Techniques)

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  • #237968

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    This forum is restricted to members of the associated course(s).

    Sunil Pathak
    Participant

    Hello Brian

    in the captioned question’s right answer the equity and retained earning has been added with outside liabilities to make total debt.

    by total debt we always meant the outside long term liabilities at least for calculating the leverage or solvency.

    please help with your explanation

    regards

     

    sunil pathak

     

     

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  • #237970

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    Lynn Roden
    HOCK international

    Hello Sunil Pathak,

    The information given in that question is “selected data.” It is not a full balance sheet.

    The line items constituting total liabilities are not all shown. Only current liabilities is given.

    Total liabilities is not the sum of 226 + 381 + 370. (If you sum those, you see they add up to 977, not 790.) Only total liabilities is given as 790, and we do not know what it consists of other than current liabilities of 370. Presumably, long-term liabilities are 790 – 370 = 420, but that is not relevant to answering the question. The debt-to-equity ratio is total liabilities divided by total equity.

    Total equity is the sum of common stock outstanding (226) and retained earnings (381), which equals 607.

    Therefore, the debt-to-equity ratio is 790 / 607 = 1.3.

    Lynn

    #237971

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    Sunil Pathak
    Participant

    thanks  Lynn

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