Question

Match the ratio to the building block of financial statement analysis to which it best relates.

A. Liquidity and efficiency B. Solvency C. Profitability D. Market prospects

1	Equity ratio	6	Accounts receivable turnover
2	Return on total assets	7	Debt-to-equity ratio
3	Dividend yield	8	Times interest earned
4	Book value per common share	9	Gross margin ratio
5	Day’s sales in inventory	10	Acid test ratio

Short answer

No	Ratio	Classification
1	Equity ratio	Solvency ratio
2	Return on total assets	Profitability ratio
3	Dividend yield	Market prospects
4	Book value per common share	Market prospects
5	Day’s sales in inventory	Liquidity and efficiency ratio
6	Accounts receivable turnover	Liquidity and efficiency ratio
7	Debt-to-equity ratio	Solvency ratio
8	Times interest earned	Solvency ratio
9	Gross margin ratio	Profitability
10	Acid test ratio	Liquidity and efficiency

Step-by-step solution

Definition of Financial Ratios

Financial ratios are the tools for financial analysis that helps to compare the various items of the financial statements.

Classification of ratios

1. Liquidity and efficiency ratio: The ratio that defines the business entity's ability to repay the current debts without takings funds from external debts is termed the liquidity ratio.

Efficiency ratio:The ratio that shows the business entity's ability to use the assets to generate income is called the efficiency ratio.

2. Solvency ratio: The ability of the business entity to meet the long-term financial liabilities is depicted by the solvency ratio. It depicts whether the cash flow of the business entity is sufficient or not for meeting the long-term obligation.

3. Profitability ratios: The ratios determining the business entity's ability to generate profit relate to its revenue and expenses. This ratio determines the percentage of revenue converted into gross profit and net profit.

4. Market prospects ratio: The investors of the business entity use the market prospects ratios to determine the return they will generate through investment in the business.