Which of the following statements is incorrect?

Question

BlackTom AI · Accepted Answer

Here we evaluate each statement in turn to determine which is incorrect.
Option 1: 'Accruing an expense decreases earnings per share.' Accruing an expense increases expenses and reduces net income, assuming no change in the number of shares outstanding. Since EPS = Net Income / Shares Outstanding (and shares are unchanged in the short term), EPS would fall. This statement is typically true.
Option 2: 'The purchase of fixed assets will cause the total asset turnover to increase.' Total asset turnover is Sales divided by Total Assets. Purchasing fixed assets increases the asset base (the denominator). Unless sales rise proportionally more than assets—which is not guaranteed—turnover would not increase; in fact, it would more often stay the same or decrease. Therefore this statement is generally false as a blanket claim, making it the candidate for the incorrect option.
Option 3: 'Purchasing fixed assets through equity financing decreases total asset turnover.' When fixed assets are purchased, total assets rise by the asset cost. If financing is via equity, total assets increase while equity also increases, but sales (the numerator) typically do not rise immediately. Consequently, asset turnover (Sales/Assets) tends to decrease or at least not increase. Thus this statement is true in typical scenarios.
Option 4: 'The return on equity ratio increases when treasury stock is purchased.' Treasury stock reduces shareholders’ equity and uses cash, so assets and equity both decrease. With net income unchanged, ROE = Net Income / Average Equity tends to rise because the denominator (equity) shrinks. This makes the statement true.
In summary, the only statement that runs counter to the usual relationships between asset base, sales, and financing is Option 2. Therefore, Option 2 is the incorrect one.

ACCT 2051 (070) Exam #3

Which of the following statements is incorrect?

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