a.
Classification of Financial ratios: Financial ratios that exhibit the relationship among various financial data of the financial statements of a business, are broadly classified into three categories;
- Profitability Ratios
- Liquidity Ratios
- Solvency Ratios
Profitability Ratio: Profitability ratio exhibits how the business is able to earn income for a specific period of time.
Solvency Ratio: Solvency ratio exhibits how the business is able to sustain over a long period of time.
To Identify: The appropriate financial ratio, a pension fund would be interested to invest in a corporations’ 20-year bonds.
b.
Classification of Financial ratios: Financial ratios that exhibit the relationship among various financial data of the financial statements of a business, are broadly classified into three categories;
- Profitability Ratios
- Liquidity Ratios
- Solvency Ratios
Liquidity Ratio: Liquidity ratio exhibits how the business is able to meet its short-term obligations and any emergency need of funds.
To Identify: The appropriate financial ratio for a bank contemplating a short-term loan.
c.
Classification of Financial ratios: Financial ratios that exhibit the relationship among various financial data of the financial statements of a business, are broadly classified into three categories;
- Profitability Ratios
- Liquidity Ratios
- Solvency Ratios
Profitability Ratio: Profitability ratio exhibits how the business is able to earn income for a specific period of time.
To Identify: The appropriate financial ratio for an investor in common stock.
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Chapter 2 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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