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Ratio of liabilities to stockholders' equity The following data were taken from Alvarado Company's balance .sheet: Dec. 31,2016 Dec. 31,2015 Total liabilities $4,085,000 $2,880,000 Total stockholders’ equity 4,300,000 3,600,000 a. Compute the ratio of liabilities to stockholders' equity. b. Has the creditor's risk increased or decreased from December 31 . 2015 , to December 31 . 2016 ?

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 1, Problem 1.8BPE
Textbook Problem
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Ratio of liabilities to stockholders' equity

The following data were taken from Alvarado Company's balance .sheet:

  Dec. 31,2016 Dec. 31,2015
Total liabilities $4,085,000 $2,880,000
Total stockholders’ equity 4,300,000 3,600,000
  • a. Compute the ratio of liabilities to stockholders' equity.
  • 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 

To determine: Ratio of liabilities to owners’ equity of Company A

Explanation of Solution

Determine ratio of liabilities to owners’ equity of Company A as on December 31, 2015, if total liabilities is $2,880,000, and total owners’ equity is $3,600,000.

Ratio of liabilities to owners’ equity = Total liabilitiesTotal owners’ equity=$2,880,000$3,600,000=0.80

Determine ratio of liabilities to owners’ equity of Company A as on December 31, 2016, if total liabilities is $4,085,000, and total owners’ equity is $4,300,000

(b)

To determine
Whether the creditor’s risk of Company A has increased or decreased from December 31, 2015 to December 31, 2016.

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