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

Financial leverage is best measured by which of the following ratios?

Debt-to-Equity Ratio

Inventory Turnover Ratio

Gross Profit Margin

Current Ratio

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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 additional assets. It is a measure of how much a company relies on borrowed funds compared to its own equity.

Identify the ratio that directly measures financial leverage: The Debt-to-Equity Ratio is the most relevant ratio for assessing financial leverage because it compares the total debt of a company to its shareholders' equity.

Clarify why other ratios are not suitable: Inventory Turnover Ratio measures how efficiently inventory is managed, Gross Profit Margin evaluates profitability, and Current Ratio assesses short-term liquidity. None of these directly measure financial leverage.

Express the Debt-to-Equity Ratio formula: The formula is \( \text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}} \). This ratio indicates the proportion of debt used relative to equity.

Conclude the reasoning: Since financial leverage is best measured by the proportion of debt to equity, the Debt-to-Equity Ratio is the correct answer.