Question

2. Briefly describe the following types of ratios and identify the financial statement users most interested in each type.

a. Liquidity ratios

b. Activity ratios

c. Profitability ratios

d. Coverage ratios

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What is the current ratio? Present a short critique of this widely used financial measure.

Answer 1

2.

a. Liquidity ratio :-

1. liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities, and is expressed as follows: The current ratio is an indication of a firm's liquidity.

2. People more intrested in this ratio is shareholders and short term credit providers like creditors.

b. Activity ratio :-

1. Activity ratios are a category of financial ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales. Activity ratios measure the relative efficiency of a firm based on its use of its assets, leverage, or other similar balance sheet items and are important in determining whether a company's management is doing a good enough job of generating revenues and cash from its resources.

Activity ratios are also commonly known as efficiency ratios.

2. The main user of activity ratio is internal management of organization to convert the neccesary accounts in to required accounts.

c. Profitability ratios

1. Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets. ... They show how well a company utilizes its assets to produce profit and value to shareholders.

2. The main users of the profitability ratios are majorly prospective investors and shareholders to evaluate the return they are getting from particular company.

d. Coverage ratio :-

1. A coverage ratio, broadly, is a group of measures of a company's ability to service its debt and meet its financial obligations such as interests payments or dividends. The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends. The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company's financial position.

2. The major users of this ratios are financial institutions and banks to evaluate the ability of the organisation to service the debts.

Current ratio :-

The current ratio is a financial ratio that shows the proportion of a company's current assets to its current liabilities. The current ratio is often classified as a liquidity ratio and a larger current ratio is better than a smaller one. However, a company's liquidity is dependent on converting the current assets to cash in time to pay its obligations.

These are all the information required to solve the given question.

I hope, all the above mentioned explanations and information are useful and helpful to you.

Thank you.