Ratios Can Be Used for Different Purposes

question 74

Essay

Ratios can be used for different purposes. For example, a variety of ratios have been developed to assess a firm's liquidity. Similarly, ratios have been developed to assess solvency, profitability, and stock market strength. A sample of commonly used ratios for these purposes is provided in the table below.
Required: In the middle column of the table, provide the formula to compute the specified ratio. In the final column, indicate the purpose (Liquidity, Solvency, Profitability, and Stock market strength)for which the ratio is most commonly used. The first item is completed as an example.

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Definitions:

Economy's Resources

The total assets available for production, including land, labor, capital, and entrepreneurship, within a given economy.

Unemployment

The situation when individuals who are able and willing to work cannot find employment, often measured as a percentage of the labor force.

Inefficient

Lacking in productivity and not making the best use of resources, resulting in wasted effort or economic inefficiencies.

Production Possibilities Frontier

A curve depicting the maximum achievable levels of two or more products given a fixed amount of resources.