Question

E4-03B.Stat Question 6 Not complete Marked out of 4.00 P Flag question Evaluating he Liquidity and Solvency of a Company Identify whether the following statements are true or false. a. The current ratio is a measure of a firm's solvency. b. The return on assets ratio is a measure of a firm's profitability. c. The profit margin is a measure of a firm's liquidity. d. The debt-to-total-assets ratio is a measure of a firm's solvency

Answer 1

Question A:

FALSE. The current ratio measures the company's short term ability to pay off the short term obligations,within a year.It measures the firms liquidity

Current Ratio = Current Assets/Current Liabalities.. Ideal Current Ratio is between 1 and 2

Question B:

TRUE. Return on Assets ratio measures the firms ability to generate the profit from its asssets.Retrun on assets ratio measures the ability of the management in generation of earningss from the assets available. Return On Assets = Operating IOncome/Total Assets

Question C:

FALSE. Profit margin measures the profitabilty of the company.It is a Profit and loss statement account. The measure of liquidity is the balance sheet item.The profit margin shows the capacity of the comapany to generate the amount of profit from yearly sales

Question D :

TRUE. Debt to Asset ratio measures the degree of financial leverage being used by the company.It measures both the short term and long term obligations A high ratio indicates high financial risk.Thus it affect the Solvency