QUESTION 3 Activity ratios measure O the liquidity of specif

QUESTION 3 Activity ratios measure: O the liquidity of specific assets and the efficiency of managing assets. O the overall performance of a firm and its efficiency in managing assets, iabilities, and equity. O the liquidity of specific liabilities and the efficiency of managing debt. O the ability to cover debt and fixed interest and lease payments. QUESTION 4 Which of the following sets of ratios would offer the best picture of a firm\'s short-term liquidity? O Debt ratio, cash flow adequacy, and times interest earned. OGross profit, operating profit and net profit margin. O Fixed asset turnover, return on total assets, and return on equity. Current ratio, quick ratio, and cash flow liquidity ratio.

Solution

1) Activity ratios measures a companies ability to convert the assets and liabilities into cash or sales .

The faster it able to do this , the most efficient the company.

For example, total assets turnover ratio - It tells us about how fast assets are used for generating the revenue.

Therefore, Activity ratios measure the liquidaity of specific assets and efficiency of managing assets.

2) Liquidity ratios analyze the ability of a company to pay both current liabilities as and when it becomes due and long term liabilitites as they become current..

these ratios shows the cash levels of a company and ability to turn other assets into cash to pay off liabilities.

Most common short term liquidity ratios are :

Quick ratio, Acid test ratio, current ratio, working capital ratio and cash flow liquidity ratio.