Calculate and Interpret Liquidity and Solvency Ratios


Ratio analysis can assist with the conduct of time-series and cross-sectional analysis of a company’s financial position.

Balance sheet ratios are those ratios which involve balance sheet items only and include (i) liquidity ratios, which measure a company’s ability to meet short-term obligations; and (ii) solvency ratios, which measure financial risk, financial leverage and a company’s ability to satisfy its long-term and other obligations.

Computation of liquidity and solvency ratios



Question 1

The following balance sheet information is given for company XYZ.

Company XYZ balance sheet


Which of the following is the current ratio for company XYZ?

A. 0.67

B. 0.34

C. 1.20


The correct answer is A. Current ratio = 2,557,034/3,825,396 = 0.67.

Question 2

Kylee Co. reported the following information on its latest balance sheet.


According to the information provided, the current ratio of Kylee Co. is closest to:

A. 3.67

B. 4.72

C. 4.33


The correct answer is C.

Current ratio = Current assets/Current liabilities

The only current assets reported on the balance sheets are cash and accounts receivables. The only current liability reported above is accounts payable.

Current ratio = (Cash + Accounts receivable)/Accounts payable = (50 + 80)/30 = 4.33


Reading 25 LOS 25h:

Calculate and interpret liquidity and solvency ratios



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