Indicate future earnings Return on common prospects. stockholders' equity Indicate the ability to pay Working capital current liabilities. Indicate how much of the Ratio of liabilities to company is financed by debt and equity. stockholders' equity
Indicate future earnings Return on common prospects. stockholders' equity Indicate the ability to pay Working capital current liabilities. Indicate how much of the Ratio of liabilities to company is financed by debt and equity. stockholders' equity
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Match each ratio that follows to its use. Items may be used more than once.
Transcribed Image Text:The image features a matching exercise with two columns. Each column contains three blue boxes that need to be matched appropriately.
Left Column:
1. "Indicate future earnings prospects."
2. "Indicate the ability to pay current liabilities."
3. "Indicate how much of the company is financed by debt and equity."
Right Column:
1. "Return on common stockholders' equity"
2. "Working capital"
3. "Ratio of liabilities to stockholders' equity"
4. "Return on total assets"
The task involves linking items from the left column (the financial indicators or needs) with the appropriate financial terms in the right column that explain or measure those indicators.
- "Indicate future earnings prospects." is related to "Return on common stockholders' equity".
- "Indicate the ability to pay current liabilities." corresponds with "Working capital".
- "Indicate how much of the company is financed by debt and equity." matches with "Ratio of liabilities to stockholders' equity".
Note: "Return on total assets" in the right column is not directly matched with any specific items in the left column in the given options.
Transcribed Image Text:### Financial Ratios and Their Purposes
This educational guide outlines several important financial ratios and explains their purposes in assessing various aspects of a company's financial health.
1. **Current Ratio:**
- **Purpose:** Indicate instant debt-paying ability.
2. **Dividends per Share:**
- **Purpose:** Indicate the extent to which earnings are being distributed to common stockholders.
3. **Earnings per Share (EPS) on Common Stock:**
- **Purpose:** Assess the profitability of the investment by common stockholders.
4. **Asset Turnover Ratio:**
- **Purpose:** Assess how effectively assets are used.
5. **Quick Ratio:**
- **Purpose:** Indicate instant debt-paying ability.
6. **Price-Earnings (P/E) Ratio:**
- **Purpose:** Assess the profitability of the assets.
For students and educators exploring financial analysis, these ratios provide insight into liquidity, profitability, and efficiency, which are essential for evaluating a company’s overall performance.
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