Chapter 2, Problem 6Q

(a)

To determine

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.

Liquidity Ratio: Liquidity ratio exhibits how the business is able to meet its short-term obligations and any emergency need of funds.

Solvency Ratio: Solvency ratio exhibits how the business is able to sustain over a long period of time.

To Ascertain: If L is correct in her judgment about the analysis of the financial statement of a company.

(b)

To determine

To Ascertain: The interests of the short-term creditors, long-term creditors and the stockholders of a company in its characteristics.