a Liquidity ratios b Profitability ratios c Solvency ratios Ans NA LO 2 Bloom K

A liquidity ratios b profitability ratios c solvency

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(a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics Solution 228 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c) Solvency ratios measure the company's ability to survive over a long period of time. S-A E 229 Give the definition of current assets, current liabilities and the current ratio. Ans: N/A, LO: 1, 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics Solution 229 Current assets are cash or other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, whichever is longer. Current liabilities are obligations reasonably expected to be paid from the existing current assets or through the creation of other current liabilities within the next year or operating cycle, whichever is longer. The current ratio is a measure used to evaluate a company’s liquidity and short-term debt paying ability, computed by dividing current assets by current liabilities.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition FOR INSTRUCTOR USE ONLY 2-74 S-A E 230 Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics Solution 230 The three parties are not primarily interested in the same characteristics of a company. Short- term creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. S-A E 231 Relevance and faithful representation are the fundamental qualities of useful information. (a) Briefly define each term. (b) Why are these characteristics important to users of financial statements? Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting Solution 231 (a) Relevance is the quality of information that makes a difference in a business decision. Information is considered relevant if it provides information that provides accurate expectations about future, and confirms or corrects prior expectations.
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