The following data were taken from Alvarado Company’s balance sheet:

The following data were taken from Alvarado Company’s balance sheet:


Dec. 31, 2014 Dec. 31, 2013
Total liabilities $4,085,000 $2,880,000
Total owner’s equity 4,300,000 3,600,000


a. Compute the ratio of liabilities to owner’s equity.

b. Has the creditor’s risk increased or decreased from December 31, 2013, to December 31, 2014?


Answer:

a. Dec. 31, Dec. 31,
2014 2013
Total liabilities……………………………………………………… $4,085,000 $2,880,000
Total owner’s equity……………………………………………… $4,300,000 $3,600,000
Ratio of liabilities to owner’s equity…………………………… 0.95 * 0.80 **
* $4,085,000 ÷ $4,300,000
** $2,880,000 ÷ $3,600,000
b. Increased