Ratios Can Be Used for Different Purposes

question 111

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. $\begin{array}{|l|l|l|l|}\hline \\\hline & \text {Ratio} & \text {Computation } & \text {Pupose} \\\hline \text { 1. } & \text { Accounts receivable turnover } &\text { Net credit sales/average receivables }&\text { Liquidity }\\\hline \text { 2. } & \text { Asset turnover } \\\hline \text { 3. } & \text { Current ratio } \\\hline \text { 4. } & \text { Debt to equity ratio } \\\hline \text { 5. } & \text { Dividend yield } \\\hline \text { 6. } & \text { Earnings per share } \\\hline \text { 7. } & \text { Inventory turnover } \\\hline \text { 8. } & \text { Net margin } \\\hline \text { 9. } & \text { Pnice-eamings ratio } \\\hline \text { 10. } & \text { Return on equity } \\\hline \text { 11. } & \text { Return on investment } \\\hline\end{array}$

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Definitions:

T-statistic

A ratio used in hypothesis testing that compares the observed difference between sample mean and the population mean relative to the sample variability.

Sample Mean

The average of all the data points in a sample.

Z-statistic

The Z-statistic is a type of standard score that indicates how many standard deviations an element is from the mean, used in hypothesis testing for normal distributions.

Standard Error

A measure that describes the distribution of sample means around the population mean in a sampling distribution.