Question

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions. (LO3-5)

d. Debt-to-assets ratio

Short answer

Inflation does not affect the debt-to-equity ratio of the corporations.

Step-by-step solution

Debt-to-asset ratio formula:

$Debt\mathit{}to\mathit{}assetratio=\frac{\mathrm{Debt}}{\mathrm{Total}\mathrm{assets}}$

Debt-to-asset ratio:

Inflation may not affect the debt to asset ratio because the value of debt and total assets of the company are not changed due to inflation.