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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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What are two frequently used ratios measuring leverage? How are they computed, and what do they mean?

To determine

Mention the two types of ratios used to measure leverage, explain the manner in which they are computed and explain its meaning.

Explanation

Financial Leverage measures:

Financial Leverage measures overlook the mixture of debt and equity which is required for analyzing the ability of the Company to meet its debt obligations as they become due.

Types of ratios used to measure leverage are as follows:

Debt-to-Asset Ratio:

Debt to asset ratio is the ratio that measures the difference between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Formula to compute debt-to-asset ratio:

Debt-to-assetratio=Totalli

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