A company has assets of $10 million and liabilities of $7 million.Liabilities include $4 million in accounts payable,$2 million in long-term notes payable and $1 million in other non-current liabilities.If a financial web site uses long-term debt rather than total liabilities to calculate the company's debt-to-assets ratio,the web site will report a ratio of:
A)0.4,which would correctly state financing risk.
B)0.4,which would suggest more financing risk than it actually has.
C)0.3,which would suggest less financing risk than it actually has.
D)0.3,which would suggest more financing risk than it actually has.

Question

Quizplus · Accepted Answer

The correct calculation for the debt-to-assets ratio is total liabilities divided by total assets, which would be 7/10 or 0.7. However, if the financial web site only uses long-term debt (which is just one component of total liabilities), the ratio will be 2/10 or 0.2. This would suggest less financing risk than it actually has, as it only takes into account a portion of the company's liabilities. Therefore, choice C is the best answer.

A Company Has Assets of $10 Million and Liabilities of $7