Question

which financial statement helps a user analyze a company’s capital structure?

a)balance sheet

b) income statement

c) statement of retained earning

d) statement of cash flows

Answer 1

Answer :A) Balance sheet.

Reason: Capital structure means capitals mix of capital,which includes debt and equity.And A firm uses debt and equity in strong balancesheet.

Capital Structure = Debts+Total shareholder's Equity*

Total shareholder's Equity=(common and preferred stock+retainrd earnings)

Analysts use the three ration to assess the company's capital structure:

1.Debt ratio(Total debt to total assets)

2.Debt to Equity ratio(Total debts to shareholder's equity)

3.Capitalization ratio(long term debt divided by (long term debt+shareholder's equity))

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B)Income statement: It consists of Revenues and Expenses which doesn't help in analyzing Capital Structure of a company.

C)Statement of Retained Earning: It is known for statement of owner's equity or a statement of shareholder.

and for better analyzing of capital structure of a firm we need both Debts and Equity so this can't help in analyzing capital structure of a company.

D)Statement of cashflows:It shows how much actual cash company has genereated and it has no relation with the analyzing company's capital structure.