The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity. It is computed as follows:To illustrate, the ratio of liabilities to stockholders' equity for Lincoln Company is computed as follows Current Assets-CurrentLiabilities=Calculated Value 1.Working capital: Ratio Numerator÷Denominator=Calculated Value 2.Current ratio 3.Quick ratio 4.Accounts receivable turnover 5.Number of days' sales in receivables 6.Inventory turnover 7.Number of days' sales in inventory 8.Ratio of Fixed assets to long-term liabilities 9.Ratio of liabilities to stockholders' equity 10.Times interest earned 11.Asset turnover 12.Return on total assets 13.Return on stockholders' equity 14.Return on common stockholders' equity 15.Earnings per share on common stock 16.Price-earnings ratio 17.Dividends per share of common stock 18.Dividend yield **Financial Analysis of Company Liabilities and Equity**The table provides a comparison of the company’s financial data for the years 20Y6 and 20Y5. The data focuses on total liabilities, total stockholders’ equity, and the ratio of liabilities to stockholders’ equity.- **20Y6:** - Total Liabilities: $310,000 - Total Stockholders’ Equity: $829,500 - Ratio of Liabilities to Stockholders’ Equity: 0.4 - Calculation: $ \frac{310,000}{829,500} = 0.4 $- **20Y5:** - Total Liabilities: $443,000 - Total Stockholders’ Equity: $787,500 - Ratio of Liabilities to Stockholders’ Equity: 0.6 - Calculation: $ \frac{443,000}{787,500} = 0.6 $**Analysis:**The data reveals a decrease in both the total liabilities and the ratio of liabilities to stockholders' equity from 20Y5 to 20Y6. This indicates that the company has reduced its liabilities relative to its equity, suggesting an improved financial position with potentially lower financial risk.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The ratio of liabilities to stockholders' equity measures how much of the company is financed by debt and equity. It is computed as follows:

To illustrate, the ratio of liabilities to stockholders' equity for Lincoln Company is computed as follows


		Current Assets	-	Current Liabilities	=	Calculated Value
1.	Working capital:

	Ratio	Numerator	÷	Denominator	=	Calculated Value

2.	Current ratio

3.	Quick ratio

4.	Accounts receivable
	turnover

5.	Number of days'
	sales in receivables

6.	Inventory turnover

7.	Number of days'
	sales in inventory

8.	Ratio of Fixed assets to
	long-term liabilities

9.	Ratio of liabilities to
	stockholders' equity

10.	Times interest earned

11.	Asset turnover

12.	Return on total assets

13.	Return on stockholders'
	equity

14.	Return on common
	stockholders' equity

15.	Earnings per share
	on common stock

16.	Price-earnings ratio

17.	Dividends per share
	of common stock

18.	Dividend yield

**Financial Analysis of Company Liabilities and Equity**

The table provides a comparison of the company’s financial data for the years 20Y6 and 20Y5. The data focuses on total liabilities, total stockholders’ equity, and the ratio of liabilities to stockholders’ equity.

- **20Y6:**
- Total Liabilities: $310,000
- Total Stockholders’ Equity: $829,500
- Ratio of Liabilities to Stockholders’ Equity: 0.4
- Calculation: $ \frac{310,000}{829,500} = 0.4 $

- **20Y5:**
- Total Liabilities: $443,000
- Total Stockholders’ Equity: $787,500
- Ratio of Liabilities to Stockholders’ Equity: 0.6
- Calculation: $ \frac{443,000}{787,500} = 0.6 $

**Analysis:**

The data reveals a decrease in both the total liabilities and the ratio of liabilities to stockholders' equity from 20Y5 to 20Y6. This indicates that the company has reduced its liabilities relative to its equity, suggesting an improved financial position with potentially lower financial risk.

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