Q.How are accounting ratios classified? Explain each category briefly.

Ratios are grouped by the kind of question they help answer - some about paying near-term bills, some about how hard assets are working, and some about earnings.

For this syllabus, accounting ratios are classified into three broad categories, based on the aspect of financial health each reveals:

1. Liquidity Ratios - assess whether the firm has enough short-term resources to meet its immediate obligations; examples are the Current Ratio, the Quick (Acid-Test) Ratio, and the Absolute Liquid Ratio.
2. Activity (Turnover) Ratios - assess how efficiently the firm uses its assets to generate sales; examples are the Stock (Inventory) Turnover Ratio, the Debtor Turnover Ratio, the Creditor Turnover Ratio, and the Working Capital Turnover Ratio.
3. Profitability Ratios - assess the firm's earning capacity, both as a margin on sales and as a return on capital invested; examples are the Gross Profit Ratio, the Net Profit Ratio, Return on Investment, and Return on Capital Employed. …

Students sometimes forget the Activity/Turnover category, naming only liquidity and profitability - remember all thr …