Analyzing and using the financial results, Accounting Basics

Assignment Help:

The two fundamental sources of equity in a company are stockholders and creditors their combined interests are called total equities. To discover the equity ratio divide stockholders' equity by total equities or total assets since total equities equals total assets. In formula format

Equity ratio=Stockholders 'equity/Total equities

The elevated the proportion of equities or assets supplied by the owners the more solvent the company. But a high portion of debt may perhaps indicate higher profitability because quite often the interest rate on debt is lower than the rate of earnings realized from using the proceeds of the debt.

An illustration illustrates this concept assume that a company with USD 100000 in assets could have raised the funds to acquire those assets in these two ways

1468_Analyzing and using the financial results.png

When a company undergo operating losses its assets decrease. In Case (A) the assets would have to get smaller by 80 per cent before the liabilities would equal the assets. In Case (2) the assets would have to minimize only 20 percent before the liabilities would equal the assets. When the liabilities go beyond the assets the company is said to be insolvent. So creditors are safer in Case (A) and will more readily lend money to the company. But if funds borrowed at 10 per cent are used to produce earnings at a 20 per cent rate Case (B) is preferable in terms of profitability. Thus owners are better off in Case (B) if the borrowed funds can earn more than they cost.


Related Discussions:- Analyzing and using the financial results

safety stock is appropriate, Given this information: Lead-time demand =...

Given this information: Lead-time demand = 600 pounds Standard deviation of lead-time demand = 52 pounds (Assume normality.) Acceptable stockout risk during lead time = 4

What is uses of purchases journal, What is uses of Purchases journal ...

What is uses of Purchases journal Purchases journal (SPECIAL JOURNAL) Used to record only credit purchases of merchandise-may be only one column which is posted to two accou

Work as assignment creator, I have just created my profile here, I want to ...

I have just created my profile here, I want to work with this platform. I am an ACCA student, completed my FIA diploma. How can I get or apply for work now?

What is current ratio in terms of accounting, Q. What is current ratio in t...

Q. What is current ratio in terms of accounting? The current ratio specifies the short-term debt-paying ability of a company. To find the current ratio we divide current assets

Accounting concepts and standards, Any activity which you perform is assist...

Any activity which you perform is assist if you comprise a set of rules to guide your efforts. Moreover, you determine that these rules are of more value to you if they are standar

Comprehensive problem in trial balance, Comprehensive Problem in Trial Bala...

Comprehensive Problem in Trial Balance Cash $ 26,470 A/R   14,222 Office Supplies    4,298 Prepaid Insurance   23,137 Equipment 131,495 A/D - Equipment   $19,096 Accounts P

Calculate the total cost and transportation costs, Buyer's Direct Mills (BD...

Buyer's Direct Mills (BDM) Inc. is a century old textile company that takes raw cotton and spins it into cotton yarn. This yarn is in turn purchased by weaving companies which prod

Determining needed adjustments, Determining needed adjustments Adjustme...

Determining needed adjustments Adjustments are required since certain changes take place during the accounting period. As time passes, although, the value of the asset is consu

Principle of accounting I, the terms debit and credit are synonymous with l...

the terms debit and credit are synonymous with left and right.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd