# Discuss the various categories of financial ratios used in financial statement analysis.docx

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Discuss the various categories of financial ratios used in financial statement analysis. Provide atleast two examples of each type of ratio and discuss what the particular ratio tells us about theperformance of a company.
Answer:i.Liquidity Ratio:Liquidity ratios are an essential financial calculation that are used to estimate or calculate thedebtor’s ability to repay its short term outstanding financial obligations (paid off within the fiscalyear) without having the need to raise any external capital. The two main calculations in theliquidity ratio includes current rationed quick ratio.-Current Ratio:The quick ratio indicates/ calculates if the organization is able to pay off its shorter debts. Itaddresses how the company can maximizes the current assents in the balance sheet to satisfythe current debts and payables. It is calculated by:Current Ratio = Current Asset / Current LiabilityIf the current ratio is less than 1, then, we can conclude that the company has more payablesthan the available capital and receivable and thus won’t be able to pay off its financialobligations in due time. However, if the current ratio is more than 1, then, it indicates that thecompany has the ability to pay off its obligations. However, it may also indicate that thecompany unsold inventory or is unable to take utilize its assets effectively.-Quick Ratio:The quick ratio indicates/ calculates if the organization is able to pay off its shorter debtswith its liquid assets (current assets that can be quickly turned into cash with little impact onthe price received in the market). It measures the dollar amount asset available in that yearagainst the dollar amount of the liabilities of the organization. It is calculated by:Quick Ratio = (Current Asset – Inventories - Prepaid Expenses) / Current LiabilitiesIf the quick ratio is 1, then it is called a normal ratio. It just shows that the company iscapable to liquidate its assets to pay off for the liabilities. However, if the company has liquidratio less than 1, then the company may not be able to pay off its liabilities in the short term,while the comet having quick ratio more than 1 can easily pay off for its liabilities.

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Financial Ratio, Generally Accepted Accounting Principles, various categories of financial ratios