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 ratios includes a component to evaluate financial leverage?

Debt to Equity Ratio

Inventory Turnover Ratio

Current Ratio

Gross Profit Margin

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Verified step by step guidance

Understand the concept of financial leverage: Financial leverage refers to the use of debt to acquire assets, with the goal of increasing returns to equity holders. Ratios that evaluate financial leverage typically involve debt and equity components.

Analyze the Debt to Equity Ratio: This ratio measures the proportion of debt financing relative to equity financing. It is calculated as \( \text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}} \). This directly evaluates financial leverage.

Review the Inventory Turnover Ratio: This ratio measures how efficiently a company manages its inventory. It is calculated as \( \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} \). It does not involve debt or equity and is unrelated to financial leverage.

Examine the Current Ratio: This ratio assesses a company's short-term liquidity by comparing current assets to current liabilities. It is calculated as \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \). It does not evaluate financial leverage.

Consider the Gross Profit Margin: This ratio measures profitability by comparing gross profit to revenue. It is calculated as \( \text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \). It does not include components related to debt or equity and is unrelated to financial leverage.