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Difference in solvency and liquidity; explain 4 ratios

Explain the differences between solvency and liquidity, and how we measure them (the ratios we use).

Please choose 4 ratios used in financial statement analysis and explain how they are calculated, what they tell us about the company, and who tends to use those ratios.

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Explain the differences between solvency and liquidity, and how we measure them (the ratios we use).

Liquidity measures are concerned with the ability to pay obligations in the short-term, typically less than a year. The two classic measures of liquidity are the current ratio (current assets/current liabilities) and the quick (or acid) ratio (cash + ST investments + AR/current liabilities).

Solvency measures are concerned with the long term ability to meet obligations. The two classic ratios for solvency are the debt to equity ratio (debt/equity) (there are a few other version of this same ratio such as the debt to assets ratio) and the times interest earned ratio (net income + taxes + interest expense / interest expense).

Please choose 4 ratios used in financial statement analysis and explain how they are calculated, what they tell us about the company, and who tends to use those ratios.

I will use the ...

Solution Summary

Your tutorial is 504 words and explains liquidity and solvency. Four ratios are studied: current ratio, quick ratio, debt to equity ratio and times interest earned. The ratios are interpreted and users are mentioned. The responses are in everyday language suitable for a novice.

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