How is the debt to assets ratio calculated?



Q28. Debt to assets ratio
How is the debt to assets ratio calculated?

A28.
Debt to assets ratio
= Total liabilities / Total assets

[Entity 28-a]
Total liabilities = $320,000
Total stockholders’ equity = $460,000
Total assets = $780,000
Debt to assets ratio
= $320,000 / $780,000 = 0.41

[Entity 28-b]
Total liabilities = $230,000
Total stockholders’ equity = $270,000
Total assets = $500,000
Debt to assets ratio
= $230,000 / $500,000 = 0.46

[Note]
Debt to assets ratio is lower for Entity 28-a than for Entity 28-b.
Thus Entity 28-a is better prepared in long-term solvency than Entity 28-b.

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