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The following data were taken from Alvarado Company’s balance sheet: a. Compute the ratio of liabilities to owner’s equity. b. Has the creditor’s risk increased or decreased from December 31, 2018, to December 31, 2019?
Financial Accounting
Solutions
Financial Accounting
The following data were taken from Alvarado Company’s balance sheet:
- a. Compute the ratio of liabilities to owner’s equity.
- b. Has the creditor’s risk increased or decreased from December 31, 2018, to December 31, 2019?
(a)
Calculate ratio of liabilities to owners’ equity of Company A.
Explanation of Solution
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:
Determine ratio of liabilities to owners’ equity of Company A as on December 31, 2018, if total liabilities is $2,880,000, and total owners’ equity is $3,600,000.
(b)
Identify whether the creditor’s risk of Company A has increased or decreased from December 31, 2018 to December 31, 2019.
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