Question

Question #5

What are the liquidity/solvency ratios and why are they important?

Question #6

What are the activity ratios and why are they important?

Answer 1

Answer 5 : solvency ratios are used to asses the long term financial position of an organisation. By these ratios it is determined whether the organisation is able to meet its long term obligations by using long term assets.

examples of solvency ratios are ,debt ratio, debt to equity ratio, interest coverage ratio, debt service coverage ratio.

liquidity ratios are used to asses the short term financial position of an organisation. By these ratios it is determined whether the organisation is able to meet its short term obligation by using its short term assets.

examples of liquidity ratios are, current ratio , quick ratio , cash ratio.

Answer 6: activity ratios are also known as turnover ratios or efficiency ratios. By these ratios it is determined that how much sales is generated by using short term and long term assets.

example is 1) stock turnover ratio: it determined that how much sales is generated by the use of stock.

= Cost of goods sold/ Average stock

2) Working capital turnover ratio = Net sales/ Net working capital

3) Total assets turnover ratio = Net sales/ total assets

it determines that how much sales is generated by using total assets.