AU 60 - Chapter 6 Questions with Complete
Solutions
leverage practice of using borrowed money to invest
leverage ratio indicates the relationship between the amount of funds supplied by
creditors and the funds supplied by the owners of the company
liquidity ratios used to determine a company's ability to pay off its short term deby
obligations; higher the value of the ratio the larger the margin of safety the coompany possesses
to cover short term debts
working capital excess of a company's current assets over its current liabilities
working capital formula current assets-current liabilities
current ratio indicates company's ability to meet its short term financial obligations
, current ratio formula current assets/current liabilities
acid-test ratio provides a measure of a company's ability to meet its current obligations if
it cannot sell its inventory
acid test ratio formula (cash+marketable securities+accountsreceivable)/current liabilities
debt to equity ratio measures the extent to which a company is financed using borrowing
rather than its own funds (owners equity)
debt to equity ratio formula long-term debt / shareholders equity
debt to assets ratio shows the extent to which a company's assets are financed by debt; if
ratio is less than .5 then the company is financing most of its assets through the equity
contributions of shareholders
debt to assets ratio formula total liabilities / total assets
Solutions
leverage practice of using borrowed money to invest
leverage ratio indicates the relationship between the amount of funds supplied by
creditors and the funds supplied by the owners of the company
liquidity ratios used to determine a company's ability to pay off its short term deby
obligations; higher the value of the ratio the larger the margin of safety the coompany possesses
to cover short term debts
working capital excess of a company's current assets over its current liabilities
working capital formula current assets-current liabilities
current ratio indicates company's ability to meet its short term financial obligations
, current ratio formula current assets/current liabilities
acid-test ratio provides a measure of a company's ability to meet its current obligations if
it cannot sell its inventory
acid test ratio formula (cash+marketable securities+accountsreceivable)/current liabilities
debt to equity ratio measures the extent to which a company is financed using borrowing
rather than its own funds (owners equity)
debt to equity ratio formula long-term debt / shareholders equity
debt to assets ratio shows the extent to which a company's assets are financed by debt; if
ratio is less than .5 then the company is financing most of its assets through the equity
contributions of shareholders
debt to assets ratio formula total liabilities / total assets
