Q9SE - Horngren'S Financial And Managerial Accounting

Question

Calculating debt ratio 

Aladdin Carpet Care had the following total assets, liabilities, and equity as of October 31: 

Assets $ 200,000 

Liabilities 30,000 

Equity 170,000 

What is Aladdin Carpet Care’s debt ratio as of October 31?

Step-by-Step Solution

Answer

Debt ratio is 0.15 or 15%

Step 1: Definition of Liabilities

The liabilities are defined as the amount that a business needs to be payable to the outside parties.

Step 2: Calculation of debt ratio

$\begin{array}{rcl}\mathrm{Debt} \mathrm{Ratio}& =& \frac{\mathrm{Total} \mathrm{Liabilities}}{\mathrm{Total} \mathrm{Assets}}\\ & =& \frac{30,000}{200,000}\\ & =& 0.15\end{array}$