Question 35

A company has 1.5% more total liabilities than total assets.

A debt ratio of 101.5% indicates that a company's total liabilities exceed its total assets by 1.5%. This means that the company is heavily leveraged and has more obligations than it owns in assets.

A) The company has 1.5% more total liabilities than net income

This option is incorrect because the debt ratio specifically compares total liabilities to total assets, not net income. Net income is a measure of profitability, while the debt ratio assesses financial leverage.

B) The company has 1.5% more current liabilities than current assets

This option is also incorrect. Current liabilities and current assets pertain to a company's short-term financial obligations and resources, respectively. The debt ratio does not directly relate to current liabilities versus current assets.

C) The company has 1.5% more total liabilities than gross sales

This option is incorrect as well. Gross sales are related to revenue generation and do not provide a direct comparison with total liabilities. The debt ratio specifically addresses the relationship between total liabilities and total assets.

D) The company has 1.5% more total liabilities than total assets

This option is correct. A debt ratio exceeding 100% clearly indicates that total liabilities surpass total assets, with the ratio of 101.5% reflecting this disparity.

Conclusion

The correct interpretation of a debt ratio of 101.5% is that the company has more liabilities than assets, specifically 1.5% more. This signifies a concerning financial position as it indicates the company is operating with a greater level of debt than it possesses in assets, while the other options misinterpret the financial metrics involved.