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Chapter 2: Q1DQ (page 74)

If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and forwhat reasons?

Short Answer

Expert verified

Short-term lenders are most interested in the short-term liquidity ratios to evaluate the short-term solvency, and long-term lenders are interested in the financial leverage ratios. The interest coverage ratio evaluates the long-term solvency position of the company. In addition, the stockholders are interested in the profitability and market ratios to know the profitability of the company.

Step by step solution

01

Short term lenders are interested in short term liquidity ratios:

Short-term lenders are interested in the short-term liquidity ratios because they owed their dues within one year. Therefore, they want to know whether the short-term assets of an organization are adequate to meet the short-term liabilities.

02

Long term lenders are interested in Financial leverage ratios and interest coverage ratios:

Long-term lenders are concerned with the financial leverage and interest coverage ratios because they owe their dues over the long term.Therefore, they want to know whether the company is over-leveraged and the gross income of the company is sufficient to meet the finance cost.

03

Stockholders are interested in profitability ratios and the market ratios:

Stockholders are concerned with the profitability ratios and the market ratios because the stockholders want that the organization earn profits consistently over time and generate cash flow to distribute to the stockholders.

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The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.

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