Question

Respond to the following in a minimum of 175 words:

Imagine that you’ve been asked to explain one of the major accounting ratios to a group of high school students who have no background in business or accounting, but who are eager to learn. Choose one of the following ratios and describe how you would explain it in your own words, using a specific example: current ratio, asset turnover, or profit margin on sales.

Answer 1

Let's consider the debt equity ratio

It means debt divided with equity

Whereas Debt means the outside liabilities or the funds borrowed from outsiders.

While equity means funds that are raised from shareholders.

Equity comprises of equity capital, preference and reserves.

Reserves should be added to the capital because shareholders are the owners of the company.

A good Debt equity ratio to be maintained is 1:1.5

It mens for every 1.5 $ of equity the company owes 1$ of Debt.

If the Debt equity ratio is more there is chance that a company may not pay the current liabilities in a timely manner there will be delays in payment cycle which may disturb the entire business of the entity.

I hope the above provided information is useful to you.

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