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

Introduction to Ratios

Financial Accounting

14. Financial Statement Analysis

Introduction to Ratios

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Multiple Choice

Which two of the following ratios are most commonly used to assess a company's financial risk?

Gross Profit Margin and Return on Assets

Debt-to-Equity Ratio and Times Interest Earned Ratio

Current Ratio and Inventory Turnover Ratio

Price-Earnings Ratio and Dividend Yield

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Verified step by step guidance

Understand the concept of financial risk: Financial risk refers to the possibility of a company being unable to meet its financial obligations. Ratios that assess financial risk typically focus on debt levels and the ability to cover interest payments.

Review the Debt-to-Equity Ratio: This ratio measures the proportion of debt financing relative to equity financing. It is calculated as \( \text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}} \). A higher ratio indicates greater financial risk due to reliance on debt.

Examine the Times Interest Earned Ratio: This ratio evaluates a company's ability to cover its interest expenses with its earnings. It is calculated as \( \text{Times Interest Earned Ratio} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}} \). A lower ratio suggests higher financial risk.

Compare other ratios provided in the options: Ratios like Gross Profit Margin, Return on Assets, Current Ratio, Inventory Turnover Ratio, Price-Earnings Ratio, and Dividend Yield are important for assessing profitability, operational efficiency, or market performance, but they are not primarily focused on financial risk.

Conclude that the Debt-to-Equity Ratio and Times Interest Earned Ratio are the most relevant for assessing financial risk, as they directly address debt levels and the ability to meet interest obligations.