Question

All of the following statements accurately describe the debt ratio except.

- The ratio might be used to help determine if a company is capable of increasing its income by obtaining further debt.

- A relatively high ratio is always desirable.

- Many factors such as a company's age, stability, profitability and cash flow influence the determination of what would be interpreted as a high versus a low ratio.

- It is of use to both internal and external users of accounting information.

- The dividing line for a high and low ratio varies from industry to industry.

choose one please

Answer 1

Option B is the Correct Answer

A relatively high ratio is always desirable.

Debt Ratio = Total Liabilities / Total Assets

It is a ratio which helps stakeholders to understand how much proportion of the asset of the company is being financed by debt either short term or long term.

A relatively high debt ratio indicates that the company is having more debt proportion in their base which is never a good sign as it can create a situation of debt trap in case of inability of company to pay its debts on time whereas a low fee debt ratio indicates the overdepedency of an organisation on its Equity Funds which is also not good so it is always advisable to keep that optimum debt ratio which keeps the situation cin balance to ease out the burden on company in their high's or lows as well.

Other than Statement No.B all the above Statements are relatable to debt ratio and in reasl sense are the essence of debt ratio which tells about how an organisation should go for an optimum debt ratio .

It is useful for both internal and external users for investment and profitability purposes.

It is also very true that the optimum ratio requirement also changes from industry to industry.

The ratio also helps in understanding the profitability impaz by the debt creation.

In Nutshell all the points are true except point B WHICH is that relatively high debt ratio is desirable.