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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Ratio of liabilities to owner’s equity

The following data were taken from Mesa Company’s balance sheet:

Chapter 1, Problem 1.8APE, Ratio of liabilities to owners equity The following data were taken from Mesa Companys balance

  1. a. Compute the ratio of liabilities to owner’s equity.
  2. b. Has the creditor’s risk increased or decreased from December 31, 2015, to December 31, 2016?

(a)

To determine

Ratio of liabilities to owners’ equity:

This ratio measures the claims of creditors over claims of owners in financing the assets. A lower ratio indicates that the company has good ability to pay off the creditors’ obligations.

Formula of ratio of liabilities to owners’ equity:

Ratio of liabilities to owners’ equity = Total liabilitiesTotal owners’ equity 

Ratio of liabilities to owners’ equity of Company M

Explanation

Determine ratio of liabilities to owners’ equity of Company M as on December 31, 2015, if total liabilities is $518,000, and total owners’ equity is $370,000.

Ratio of liabilities to owners’ equity = Total liabilitiesTotal owners’ equity=$518,000$370,000=1

(b)

To determine

Whether the creditor’s risk of Company M has increased or decreased from December 31, 2015 to December 31, 2016

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