Critical Accounting Principles and Assumptions and More Debits and Credits
Q: If both net worth and total assets decrease by the same amount would the leverage ratio remain unchanged?
A: If both net worth and total assets decrease by the same amount, the leverage ratio would change. For example, if total assets are $100,000 and net worth is $40,000, then total liabilities would be $60,000. The leverage ratio would be total liabilities of $60,000 divided by net worth of $40,000 = 1.5.
If total assets and net worth both decreased by $10,000 to $90,000 and $30,000 respectively, the leverage ratio would increase to 2.0 – total liabilities of $60,000 divided by net worth of $30,000 = 2.0.
Course overview: Critical Accounting Principles and Assumptions and More Debits and Credits