What Is the Difference Between a Liquidity Ratio and a Leverage

question 20

Multiple Choice

What is the difference between a liquidity ratio and a leverage ratio?

• A)Liquidity ratios do not include debt while leverage ratios include debt.
• B)Liquidity has a short-term focus while leverage has a long-term focus.
• C)Liquidity ratios use balance sheet accounts while leverage ratios use the income statement.
• D)There is no difference.

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Definitions:

Break-Even Point

The juncture where the overall expenses match the overall income, leading to neither a profit nor a loss.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of production volume, such as rent, salaries, and insurance premiums.

Variable Costs

Costs that change in proportion to the level of goods or services produced by a business.

Net Income

The amount of profit remaining after all expenses, taxes, and costs have been deducted from total revenue.