Question

Which of the following financial ratios would be most useful to an auditor seeking information on a company’s ability to sustain losses?

Multiple Choice

• Inventory turnover

• Earnings per share

• Debt to equity

• Days’ sales in accounts receivable

Answer 1

Solution

_{Debt to Equity}

_{If the equity is more than debts, the company is at less risk. Such companies incur only less interest cost.On the other hand if the company has more debt than equity, it has to incur more interest cost.0}

So debt to equity ratio is more relevant for an auditor seeking information on a ompany's a ility to sustain losses.