Match the following:

I. Test of Liquidity	A. ROI
II. Test of Profitability	B. Debtors turnover
III. Test of Solvency	C. Acid test ratio
IV. Test of Activity	D. Debt equity ratio

Solution

Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current. 1. Test of liquidity : Quick Ratio, Acid test Ratio, Current Ratio, Working Capital ratio Profitability ratios compare income statement accounts and categories to show a company’s ability to generate profits from its operations. Profitability ratios focus on a company’s return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations. 2. Test of Profitability : Return of Investment/Asset/Equity, Return on capital Employed Solvency ratios , also called leverage ratios, measure a company’s ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings. 3. Test of solvency : Debt-to-Equity Ratio Activity ratios aka asset utilization ratios or operating efficiency ratios measure how efficiently a company performs its daily tasks such as managing its various assets. [if !supportLists]-->4. [endif]--> Test of activity ratio : Inventory turnover, Receivables turnover, Payables turnover, Working capital turnover, Total asset turnover.