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. 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. 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. 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. Test of activity ratio: Inventory turnover, Receivables turnover, Payables turnover, Working capital turnover, Total asset turnover.