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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207

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BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207
Textbook Problem

Briefly explain the difference between liquidity, solvency, and profitability analysis.

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities,

profitability, and overall performance of a company.

To determine: the differences between liquidity, solvency, and profitability ratios.

Explanation

In general, as said above, financial ratios are mainly used for evaluation of the liquidity, capabilities, profitability, and overall performance of a company.

 Thus, following are the financial ratios and its measure:

  • Liquidity ratio: Liquidity ratios are used to measure the ability of the company towards fulfilling the obligations and requirements of the cash at the short-term.  Some of the ratios are current ratio, acid-test ratio, inventory turnover ratio, and accounts receivable ratio.
  • Solvency ratio: Next, solvency ratios are those ratios used to measure the ability of the company towards survival for a longer period.
  • Profitability ratio: Profitability ratios are those ratios used to measure the extent of income for particular time period.
Conclusion

Thus, above are the differences between liquidity, solvency, and profitability ratios.

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