# 5. Uses and Analysis of the Balance Sheet

## g. convert balance sheets to common-size balance sheets and interpret common-size balance sheets;

## h. calculate and interpret liquidity and solvency ratios.

What are the three liquidity ratios? 1. Current ratio 2. Quick ratio (acid-test ratio) 3. Cash ratio

What is the calculation for the current ratio? \(current\ ratio = \frac{current\ assets}{current\ liabilities}\)

What is the calculation for the quick ratio (acid-test ratio)? \(quick\ ratio = \frac{cash + marketable\ securities + receivables}{current liabilities}\)

What is the calculation for the cash ratio? \(cash\ ratio = \frac{cash + marketable\ securities}{current\ liabilities}\)

What are the two solvency ratios? 1. Total debt ratio 2. Financial leverage ratio

What is the calculation for the total debt ratio? \(Total\ debt\ ratio = \frac{total\ debt}{total\ assets}\)

What is the calculation for the financial leverage ratio? \(Financial\ leverage\ ratio = \frac{total\ assets}{total\ equity}\)

##### Source:

CFA

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- 115.040.04 Financial Analysis - Reading 22. Understanding Balance Sheets to 115.040.04.05 Financial Analysis - Reading 22 - 5. Uses and Analysis of the Balance Sheet