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 ratio most directly indicates the extent of a company's reliance on financial leverage?

Gross Profit Margin

Current Ratio

Inventory Turnover Ratio

Debt to Equity Ratio

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Verified step by step guidance

Step 1: 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. The extent of reliance on financial leverage is measured by comparing the amount of debt to equity in a company.

Step 2: Review the Debt to Equity Ratio formula. The Debt to Equity Ratio is calculated as:

\frac{Debt}{Equity}

. This ratio shows the proportion of debt financing relative to equity financing.

Step 3: Compare the given ratios. Gross Profit Margin measures profitability, Current Ratio assesses liquidity, and Inventory Turnover Ratio evaluates operational efficiency. None of these directly measure financial leverage.

Step 4: Recognize that the Debt to Equity Ratio is the most direct indicator of financial leverage. A higher ratio suggests greater reliance on debt financing, while a lower ratio indicates less reliance on debt.

Step 5: Conclude that the Debt to Equity Ratio is the correct answer because it specifically quantifies the extent of a company's reliance on financial leverage.