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

The debt-to-equity ratio is computed as:

\( \frac{\text{Total Liabilities}}{\text{Total Equity}} \)

\( \frac{\text{Total Assets}}{\text{Total Equity}} \)

\( \frac{\text{Total Equity}}{\text{Total Liabilities}} \)

\( \frac{\text{Net Income}}{\text{Total Equity}} \)

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Verified step by step guidance

Understand the concept of the debt-to-equity ratio: It is a financial metric used to evaluate a company's financial leverage by comparing its total liabilities to its total equity.

Identify the formula for the debt-to-equity ratio: The correct formula is \( \frac{\text{Total Liabilities}}{\text{Total Equity}} \). This formula measures how much debt a company is using to finance its assets relative to the equity provided by shareholders.

Analyze the options provided in the problem: Compare each formula to the correct debt-to-equity ratio formula. For example, \( \frac{\text{Total Assets}}{\text{Total Equity}} \) is not correct because it measures a different financial metric, such as the asset-to-equity ratio.

Eliminate incorrect options: Discard formulas that do not match the definition of the debt-to-equity ratio. For instance, \( \frac{\text{Total Equity}}{\text{Total Liabilities}} \) is the inverse of the debt-to-equity ratio, and \( \frac{\text{Net Income}}{\text{Total Equity}} \) is related to return on equity, not leverage.

Select the correct formula: Based on the analysis, the correct formula for the debt-to-equity ratio is \( \frac{\text{Total Liabilities}}{\text{Total Equity}} \).