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ACCT 140-45 ACCT140-45 ACCT/140-45 Notes #16 [11-7-16] – Read Chapter 10

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ACCT 140-45 ACCT140-45 ACCT/140-45 Notes #16 [11-7-16] – Read Chapter 10

Read Chapter 10
PA 10 – 4
S 10 – 1
S 10 – 2
Solvency Ratios
Debt (to assets) Ratio = total liabilities / total assets
Ideally < 50%
Lower = more solvent
Times interest earned
[Net income + interest expense + income tax expense] / interest expense
Higher = “safer”

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ACCT 140-45 ACCT140-45 ACCT/140-45 Notes #16 [11-7-16] – Read Chapter 10

Read Chapter 10
PA 10 – 4
S 10 – 1
S 10 – 2
Solvency Ratios
Debt (to assets) Ratio = total liabilities / total assets
Ideally < 50%
Lower = more solvent
Times interest earned
[Net income + interest expense + income tax expense] / interest expense
Higher = “safer”
When a company needs a lot of cash (for a major capital expansion—long-term assets)
Issue (sell) bonds (an I.O.U.)
Secured bonds – lower interest rates = less risk
Mortgage bond payable = building