Q17RQ - Horngren'S Financial And Managerial Accounting

Question

What does the debt to equity ratio show, and how is it calculated?

Step-by-Step Solution

Answer

Debt to equity ratio measure the ability to pay debt by using the equity. It is the ratio of debt and equity.

Step 1: Definition of debt

Debt is the amount that a company owes. Debt includes notes payable, loans, etc.

Step 2: Debt-equity ratio

The debt-equity ratio is a ratio that shows the relationship between total liabilities and total equity. The debt-equity ratio is calculated by dividing total liabilities by total equity.

$Debt-Equity Radio=\frac{Total Liabilities}{Total Equity}$