alleryStart learning →A bakery reports total liabilities of $70,150 and owners' equity of $78,750. What is its debt-to-equity ratio?
A112.3%
B47.1%
C89.1%
D8.9%
Answer & Solution
Correct answer: C. 89.1%
1. The debt-to-equity ratio divides total liabilities by owners' equity.
2. Total liabilities are $70,150.
3. Owners' equity is $78,750.
4. Divide: $70,150 divided by $78,750 equals 0.891.
5. As a percentage that is 89.1 percent.
6. In plain terms the company carries 89 cents of debt for every dollar the owners have provided.
7. Answering 112.3 percent inverts the fraction and would wrongly suggest debt exceeds equity.
8. Answering 47.1 percent divides liabilities by total assets instead, which is a different ratio altogether.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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