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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 1, Problem 8PEB
Textbook Problem
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The following data were taken from Alvarado Company’s balance sheet:

Chapter 1, Problem 8PEB, The following data were taken from Alvarado Companys balance sheet: a. Compute the ratio of

  1. a. Compute the ratio of liabilities to owner’s equity.
  2. b. Has the creditor’s risk increased or decreased from December 31, 2018, to December 31, 2019?

(a)

To determine

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:

  Ratio of liabilities to owners’ equity = Total liabilitiesTotal 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.

  Ratio of liabilities to owners’ equity = Total liabilitiesTotal 

(b)

To determine

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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Financial Accounting
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