Do you use for the financial leverage average assets and average equity, or just assets and equity? Bets, Alex.
It is Total asset/total Equity
Leverage is a snapshot ratio, unlike some of your return on _____ ratios that describe some performance over a period. In the former we use total asset/total equity, but in the latter we use an average over the previous reporting period.
sometimes figures that come from balance sheets like assets or what have you are done on an average basis. I haven’t seen this particular issue come up in any of the level one questions yet.
I was just thinking about this…when should I use average values vs when I should use “snapshot” values. I guess the general rule is that balance sheet accounts are averages? Income statement items are just that value.
Thats right, the exam won’t explicitly say what to use, but given “certain” material-B/S,I/S you should conclude which you can even use.
panny 145 the rule is - when calculating a ratio that has a income statement item in the numerator and B/S item in the denominator, averages for B/S items have to be used. For example - Inventory turnover = COGS/avg inventory receivables turnover = sales/avg receivables Again it depends on what values are given. if beg. and ending values are not given then obviously we have to stick to what is given.