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    Question

    Match the following:

    border="1" cellspacing="0" cellpadding="0"> 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
    A I-A, II-B, III-C, IV-D Correct Answer Incorrect Answer
    B I-B, II-C, III-A, IV-D Correct Answer Incorrect Answer
    C I-C, II-A, III-D, IV-B Correct Answer Incorrect Answer
    D I-C, II-D, III-B, IV-A Correct Answer Incorrect Answer

    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.

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