All of the Following Statements Regarding the Ratio of Liabilities

question 210

Multiple Choice

All of the following statements regarding the ratio of liabilities to stockholders' equity are true except

• A) a ratio of 1 indicates that liabilities equal stockholders' equity
• B) sole proprietorships can use this ratio but substitute total owner's equity for total stockholders' 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

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Definitions:

Segregation of Duties

A principle in accounting and corporate governance that aims to reduce the risk of error and fraud by dividing responsibilities among different individuals or departments.

Accounts Receivable

Financial obligations of clients or customers towards a business for received goods or services that are awaiting payment.

Subsidiary Ledger

A subsidiary ledger is a group of similar accounts whose totals summarize into a single amount shown in the general ledger, aiding detailed financial analysis and tracking.

Fraud Triangle

The fraud triangle is a model that explains the factors that lead individuals to commit fraud: pressure, opportunity, and rationalization.