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

a. The ratio is computed by dividing total equity by total liabilities.

b. Higher financial leverage means greater risk.

c. A relatively low ratio signifies lower risk.

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

e. The ratio is computed by dividing total liabilities by total assets.

a. The ratio is computed by dividing total equity by total liabilities.

Explanation:

The debt ratio is a financial ratio which determines company leverage. This ratio is calculated by dividing total liabilities by total assets of the company. The higher the debt ratio means corporations are exposed to high risk. This ratio helps to find out company ability to pay off its liabilities with its assets. This ratio is used by both internal and external users of accounting information. This ratio helps potential investors to assess riskiness of a company.

The correct answer is letter "A": The ratio is computed by dividing total equity by total liabilities.

Explanation:

The Debt Ratio compares the total debt of a corporation by its total assets, to tell us how highly the company is leveraged. In other words, how much of its assets are being financed by debt. The debt component of the ratio is composed of both traditional debt and operating liabilities.

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