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 building block of financial statement analysis is most closely associated with the current ratio?

Market prospects

Solvency

Profitability

Liquidity and efficiency

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Verified step by step guidance

Understand the concept of the current ratio: The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations with its short-term assets. It is calculated as Current Assets ÷ Current Liabilities.

Identify the building block of financial statement analysis: Financial statement analysis has four main building blocks—liquidity and efficiency, solvency, profitability, and market prospects.

Relate the current ratio to liquidity: Liquidity refers to a company's ability to meet its short-term obligations, which aligns directly with the purpose of the current ratio. Efficiency, often paired with liquidity, measures how effectively a company uses its assets.

Eliminate unrelated building blocks: Solvency focuses on long-term obligations, profitability measures a company's ability to generate earnings, and market prospects assess future growth potential. These are not directly related to the current ratio.

Conclude that the correct building block is liquidity and efficiency, as the current ratio is a key measure of a company's short-term financial health and operational efficiency.