Multiple Choice
Which type of financial ratio can reveal that a company is relying too much on borrowed money?
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1. Introduction to Accounting
Types of Accounting
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Which of the following will increase your total loan balance?
A
Receiving a loan forgiveness
B
Accrued interest added to the principal
C
Making regular principal payments
D
Paying more than the minimum payment
Verified step by step guidance1
Understand the concept of loan balance: The total loan balance is the sum of the principal amount borrowed and any accrued interest that has been added to the principal.
Analyze the options provided: Receiving loan forgiveness reduces the loan balance, making regular principal payments reduces the loan balance, and paying more than the minimum payment also reduces the loan balance.
Focus on accrued interest: Accrued interest refers to the interest that accumulates on the loan over time. If this interest is added to the principal, it increases the total loan balance.
Recognize the impact of capitalization: When accrued interest is added to the principal, it is called capitalization. This increases the total loan balance because future interest calculations will be based on the new, higher principal amount.
Conclude that the correct answer is 'Accrued interest added to the principal,' as this is the only option that increases the total loan balance.
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