Final answer:
When an owner withdraws funds ($50,000 in this case), the Return on Investment (ROI) decreases since the owner's equity is reduced, while the debt ratio stays the same since total liabilities and total assets are unaffected. Option D (ROI decreases; debt ratio stays the same) is correct.
Step-by-step explanation:
The question pertains to the effect of owner's drawings on Return on Investment (ROI) and debt ratio. ROI is a measure of the profitability of an investment and is calculated by dividing the net income by the owner's equity. The debt ratio measures the proportion of a company's assets that are financed by debt and is calculated by dividing total liabilities by total assets.
When an owner withdraws funds from the business ($50,000 in this case), the owner's equity is reduced by that amount. Assuming that net income and total assets remain unchanged, the ROI will decrease because the denominator (owner's equity) is smaller. However, drawings do not affect total liabilities or total assets, so the debt ratio remains the same. Therefore, the correct statement is: D. ROI decreases; debt ratio stays the same.
To give a broader context, a nation's budgetary position and its effects on the debt/GDP ratio are analogous in some ways. A nation can run budget deficits and still see its debt/GDP ratio fall if the economic growth (increase in GDP) outpaces the growth in debt. Similarly, it is possible, although less likely, for a nation running budget surpluses to see its debt/GDP ratio rise during economic contractions where GDP falls more than the debt is reduced. However, these macroeconomic phenomena are different from the impact of owner's drawings on a company's financial ratios.