Ch. 5

Question 1

current ratio

Answer 1

which provides a measure of short-term liquidity

Question 2

debt to equity (or total assets) ratio

Answer 2

which provides a measure of longer-term solvency

Question 3

Major limitations of the statement of financial position are the following:

Answer 3

1. Many assets and liabilities are stated at the their historical cost (which, for certain assets, may be less relevant than current fair value).
2. Judgements and estimates are used in determining many of the items reported on the statement of financial position.
3. The statement of financial position necessarily leaves out many items that are relevant to the business, but cannot be recorded objectively.