Question

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) Corporation can use this ratio but subtitute total stockholder's equity for total owner's equity.
(C) The higher this ratio, the better able a business is to withstand poor business conditions and pay creditors.
(D) The lower this ratio, the better able a business is to withstand poor business conditions and pay creditors.

Answer 1

The statement that is incorrect is (C) - The higher the ratio of liabilities to owner’s equity, the better a business can withstand poor business conditions. A lower ratio actually indicates a stronger financial position.

Step-by-step explanation:

All of the following statements regarding the ratio of liabilities to owner’s equity are true except (C) The higher this ratio, the better able a business is to withstand poor business conditions and pay creditors. This statement is incorrect because a high ratio indicates that a business has more liabilities compared to its owner's equity, which can imply that the company may be over-leveraged and in a riskier position, especially in poor business conditions. Instead, it is the lower ratio, as stated in option (D), that suggests a stronger financial position and a better ability to withstand economic downturns.

Shareholder liability is limited to the amount they have invested in the corporation, making it easier for corporations to raise or borrow money for expansion or other business purposes. Corporations can use this ratio and substitute total stockholder's equity for total owner's equity, as they are owned by shareholders.

Answer 2

(C) The higher this ratio, the better able a business is to withstand poor business conditions and pay creditors.

Step-by-step explanation:

The ratio is as follow:

liabilities / equity

if the ratio is high, this means liabilities are greater than equity. The situation of the company will be more fragile, as the creditors are less flexible on their payment than investor. The lender require a certain amount of interest on specific dates, while investor may accept to not receive dividends in bad year, the interest expense can move the business to bankruptcy. This means, the Statement C is false, a higher ratio do not make the company's ability to pay their creditor more easily