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Ratio of liabilities to stockholders’ equity The following data were taken from Alvarado Company’s balance sheet: a. Compute the ratio of liabilities to stockholders’ equity for each year. b. Has the creditor’s risk increased or decreased from December 31, 20Y3, to December 31, 20Y4?
Financial And Managerial Accounting
Solutions
Financial And Managerial Accounting
Ratio of liabilities to stockholders’ equity
The following data were taken from Alvarado Company’s balance sheet:
a. Compute the ratio of liabilities to stockholders’ equity for each year.
b. Has the creditor’s risk increased or decreased from December 31, 20Y3, to December 31, 20Y4?
a.
Compute the ratio of liabilities to stockholder's equity for the given years.
Explanation of Solution
Ratio of liabilities to stockholder's equity: This ratio measures the claims of creditors over claims of stockholders in financing the assets of a company. A lower ratio indicates that the company is able to pay off the creditors’ obligations efficiently. Formula of ratio of liabilities to stockholder's equity:
Calculation of ratio of liabilities to stockholder's equity for Company A as on December 31, 20Y4.
b.
Compare the changes in the creditor’s risk from December 31, 20Y3 to December 31, 20Y4.
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