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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Cornerstone Exercise Ratio Analysis

Red Corporation had $1,750,000 in total liabilities and $3,000,000 in total assets as of December 31, 2020. Of Red’s total liabilities, $600,000 is long-term.

Required:

Calculate Red’s debt to assets ratio and its long-term debt to equity ratio. {Note: Round answers to four decimal places.)

To determine

Debt to Total asset Ratio:

Debt to total asset ratio is the relationship between the Total liabilities and Total Assets of a corporation. Debt to total asset ratio shows the part of assets financed by debts. It is calculated by dividing total liabilities by total assets. The formula of debt ratio is as follows:

Debt Ratio = Total LiabilitiesTotal Assets

Debt to Equity Ratio:

Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total Stockholder’s Equity. The formula to calculate Debt to equity ratio is as follows:

Debt to equity ratio = Total liabilitiesTotal Stockholder’s Equity

To calculate:

The debt to asset ratio and Long term debt to equity ratio.

Explanation

The debt to asset ratio and Long term debt to equity ratio are calculated as follows:

Total Liabilities (A) $ 1,750,000
Total Assets (B) $ 3,000,000
Debt to Asset ratio (A/B) 0...

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