Q17RQ - Horngren'S Financial And Managerial Accounting

Question

What is the calculation for the debt ratio? Explain what the debt ratio evaluates.

Step-by-Step Solution

Answer

The debt ratio is calculated by dividing liabilities by total assets and it evaluates the ability of the company to pay its debt.

Step 1 Calculation of debt ratio

The debt ratio is computed by dividing total liabilities by the total assets of the company. It can be shown as:

$\mathrm{Debt} \mathrm{Ratio}=\frac{\mathrm{Total} \mathrm{Liabilities}}{\mathrm{Total} \mathrm{Assets}}$

Step 2 Evaluation using debt ratio

The debt ratio computed by dividing liabilities by assets which shows that percentage of assets that are financed with liabilities and it evaluates the company’s ability to pay the debt.