Question

True or False

1. The debt ratio is computed by dividing total liabilities by current assets.

2. Working capital is the excess of current assets over current liabilities.

3. From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.

4. The trend in ratios is usually more useful than looking at a single year's ratio.

Answer 1

1. The debt ratio is computed by dividing total liabilities by current assets. - False

Reason:- Debt ratio is computed by dividing total debt by total assets

2. Working capital is the excess of current assets over current liabilities. - True

Reason:- Current assets are assets that are disposible in shorterm and current liabilities are liabilities that needs to be setteled in shortterm, the difference between these measure the shorterm liquidity of business. This is called Working Capital (or capital required to run short term)

3. From a creditor's point of view, the lower the debt ratio; the safer the creditor's position.- True

Reason:- Debt ratio is computed by dividing total debt by total assets, so higher the debt higher is the debt ratio, which means the company is highly leveraged thus implying higher financial risk to creditors. Thus lower the debt ratio, safer the creditor.

4. The trend in ratios is usually more useful than looking at a single year's ratio. - True

Reason:- One cannot understand or analyze the performance of a company with a single years ratio, we will need to compare it with previous years/ future budgets or with business with same structure to analyze the performance. Comparability is required to understand ratios.