All of the following statements regarding the ratio of liabilities to owner's equity are true except:
A) A ratio of 1 indicates that liabilities equal owner's equity.
B) Corporations can use this ratio but substitute total stockholders' equity for total owner's equity.
C) The higher this ratio is, the better able a business is to withstand poor business conditions and pay creditors.
D) The lower this ratio is, the better able a business is to withstand poor business conditions and pay creditors.

Question

Quizplus · Accepted Answer

A higher ratio of liabilities to owner's equity indicates more debt relative to equity, which generally means higher financial risk and less ability to withstand poor business conditions.

All of the Following Statements Regarding the Ratio of Liabilities