Chapter 14, Problem 1DQ

To determine

Determine the differences between liquidity, solvency, and profitability ratios.

Explanation of Solution

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

In general, as said above, financial ratios are mainly used for evaluation of the liquidity, capabilities, profitability, and overall performance of a company.

Thus, following are the financial ratios and its measure:

• Liquidity ratio: Liquidity ratios are used to measure the ability of the company towards fulfilling the obligations and requirements of the cash at the short-term.  Some of the ratios are current ratio, acid-test ratio, inventory turnover ratio, and accounts receivable ratio.
• Solvency ratio: Next, solvency ratios are those ratios used to measure the ability of the company towards survival for a longer period.
• Profitability ratio: Profitability ratios are those ratios used to measure the extent of income for particular time period.

Conclusion

Thus, above are the differences between liquidity, solvency, and profitability ratios.