medium · Financial Accounting liabilities-bonds-payable
A firm has a $100,000 warranty liability balance. It discovers that a manufacturing flaw will likely cause $250,000 in additional claims.
If the firm records this $250,000 increase, what is the impact on its Debt-to-Equity ratio?
- The ratio increases because total liabilities rise and total equity falls.
- The ratio is unchanged since the warranty expense is non-cash.
- The ratio decreases because the firm is simply being more conservative.
- The ratio decreases because total reported assets stay unchanged in this entry.
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