Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Debt to Equity Ratio

Financial Accounting

14. Financial Statement Analysis

Ratios: Debt to Equity Ratio

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Multiple Choice

Which of the following is a ratio used to evaluate a company's solvency?

Gross Profit Margin

Inventory Turnover Ratio

Current Ratio

Debt to Equity Ratio

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Verified step by step guidance

Understand the concept of solvency: Solvency refers to a company's ability to meet its long-term obligations and sustain operations over the long term. Ratios used to evaluate solvency focus on the relationship between a company's debt and equity or its ability to cover long-term liabilities.

Review the given options: Gross Profit Margin, Inventory Turnover Ratio, Current Ratio, and Debt to Equity Ratio. Each of these measures different aspects of a company's financial health.

Eliminate irrelevant options: Gross Profit Margin measures profitability, not solvency. Inventory Turnover Ratio evaluates how efficiently inventory is managed, which is unrelated to solvency. Current Ratio measures liquidity, focusing on short-term obligations rather than long-term solvency.

Focus on the Debt to Equity Ratio: This ratio is specifically designed to assess solvency by comparing a company's total liabilities to its shareholders' equity. It is calculated using the formula:

\frac{Total Liabilities}{Shareholders' Equity}

. A higher ratio indicates greater reliance on debt, which may signal lower solvency.

Conclude that the Debt to Equity Ratio is the correct answer because it directly evaluates a company's solvency by analyzing the proportion of debt financing relative to equity financing.