Question

detail which stakeholder entities (suppliers, employees, managers, investors, etc.) would care most about each of the for financial ratio categories. why? (be specific and not murky that all entities care about all categories)

Financial Statement Analysis Ratios The ratios used to facilitate the interpretation of an entity's financial position and re- sults of operations can be grouped into four categories: 1. Liquidity. 2. Activity. 3. Profitability. 4. Debt or financial leverage.

Answer 1

Ans: 0 Liquidity Ratio Liquidity refers to the ability of a concern to meet its current obligations as and cohen these become due. The short-term obligations are met by realising amounts from Current , floating ok i circulating assets. The current assets should either be liquid or near liquidity. These should be convertible into cash for paying obligations of short- -terem nature. The è sufficiency or insuffi - ciency of Curnent assets should be assessed by comparing them with short-term (current) liabilities. If current assets can pay off current liabilities, then liquidity position will be satisfac- -tory. On the otherchand , if ceennent liabilities may not be easily met out of current assets then liquidity position will be bad. Therefore, the bon suppliers, employees, managers, investors ete are interested in the liquidity of the concern. They will extend credit only if they are sure that connent assets

e enough to pay out the obligations: To measune the liquidity of a finom, the following ration can be calculated ! w cunnent natio o Quick or Acid Test on liquid nasio (6) Absolute Liquid natio Id lint Interval measure on Defensive Internal natio. 6) Activity Ratio ! funds are invested in various assets in business to make sales and earn profits. The better management of assets will increase the amount of sales and the profits. Activity ratios measure the efficiency or effectiveness with which a firm manages its resources on assets. Therefore the suppliers, employees, managens, investons ere are interested to know the efficiency on effectiveness of resources . ③ Profitability Ratio ! These natios measure the results of business openations or overall performance and effectiveness of va firm tе grоw Prof+ ratio , opdhakim rado on return on capital employed. The taking is to Considered busine primary objective of a business under- earn profits Profit earning is essential for the survival of the

A business needs Lith onistence butalso diversification: profits not only to for expansion and Therefore, the investors want an ad adequate return on their investments, employees want higher wages, creditors want higher Security for their interest and loan and so a y Deft on financial Loverage ratio Deft ratios convey a firem's ability to meet the intenest costs and repayments schedules of its Longterm obligations sine Deft- Equity ratio, intercest coverage ration Livenago ratios should the proportions of debt and equity in financing of the firem. Therefore the investors, creditons on employes to know how the proportions of debt and eavity in po firmi