Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Introduction to Ratios

Financial Accounting

14. Financial Statement Analysis

Introduction to Ratios

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Multiple Choice

Which of the following ratios is most commonly used to analyze a company's liquidity?

Current Ratio

Inventory Turnover Ratio

Return on Equity

Debt-to-Equity Ratio

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Verified step by step guidance

Understand the concept of liquidity: Liquidity refers to a company's ability to meet its short-term obligations using its current assets. Ratios that measure liquidity focus on the relationship between current assets and current liabilities.

Review the Current Ratio: The Current Ratio is calculated as \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \). It is the most commonly used ratio to analyze liquidity because it directly measures whether a company has enough assets to cover its liabilities.

Analyze why Inventory Turnover Ratio is not suitable: Inventory Turnover Ratio measures how efficiently a company sells and replaces its inventory, which is more related to operational efficiency than liquidity.

Evaluate why Return on Equity is not relevant: Return on Equity (ROE) measures profitability and the return generated on shareholders' equity, which does not provide insights into liquidity.

Consider why Debt-to-Equity Ratio is not appropriate: Debt-to-Equity Ratio assesses a company's financial leverage and capital structure, focusing on long-term solvency rather than short-term liquidity.