Ratios Can Be Used for Different Purposes

question 42

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:

Self-serving Bias

A cognitive bias where individuals attribute their successes to internal factors and failures to external factors.

In-group/out-group Bias

Describes the tendency to favor members of one's own group (the in-group) over those from different groups (the out-group), often leading to prejudice and discrimination.

Fundamental Attribution Error

The tendency to overemphasize personality-based explanations for behaviors observed in others while underestimating the influence of situational factors.

Situational Causes

External environmental factors or conditions that influence an individual's behavior or outcomes, as opposed to intrinsic or internal factors.