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 of the following ratios is used to measure a firm's leverage?

Gross Profit Margin

Current Ratio

Debt-to-Equity Ratio

Inventory Turnover Ratio

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Verified step by step guidance

Understand the concept of leverage: Leverage refers to the use of borrowed funds to finance the assets of a company. It is a measure of how much debt a company uses in relation to its equity.

Identify the correct ratio: The Debt-to-Equity Ratio is the financial metric used to measure a firm's leverage. It compares the total liabilities (debt) of a company to its shareholders' equity.

Write the formula for Debt-to-Equity Ratio: The formula is \( \text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}} \).

Explain the significance of the ratio: A higher Debt-to-Equity Ratio indicates that a company is using more debt relative to equity, which can increase financial risk but also potentially amplify returns.

Clarify why other ratios are not relevant: Gross Profit Margin measures profitability, Current Ratio assesses liquidity, and Inventory Turnover Ratio evaluates operational efficiency. None of these directly measure leverage.