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 primarily used to measure a company's liquidity?

Debt-to-Equity Ratio

Inventory Turnover Ratio

Return on Equity (ROE)

Current 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 measuring liquidity focus on the relationship between current assets and current liabilities.

Review the Current Ratio formula: The Current Ratio is calculated as \( \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \). This ratio indicates how many times a company can cover its short-term liabilities with its short-term assets.

Compare the given ratios: Debt-to-Equity Ratio measures financial leverage, Inventory Turnover Ratio measures operational efficiency, and Return on Equity (ROE) measures profitability. None of these directly assess liquidity.

Identify the correct ratio: The Current Ratio is specifically designed to measure liquidity, as it focuses on the relationship between current assets and current liabilities.

Conclude that the Current Ratio is the correct answer because it directly evaluates a company's ability to meet short-term obligations, which is the essence of liquidity.