The measures most often used in evaluating solvency--the current ratio, quick ratio, and amount of working capital are developed from amounts appearing in the:
A) Balance sheet.
B) Income statement.
C) Statement of changes in equity.
D) Statement of cash flows.

Question

Quizplus · Accepted Answer

The current ratio, quick ratio, and amount of working capital are all derived from information presented in the balance sheet, which provides a snapshot of a company's financial position at a specific point in time. The current ratio is calculated by dividing current assets by current liabilities, while the quick ratio (also known as the acid-test ratio) is calculated by subtracting inventories from current assets and then dividing by current liabilities. Working capital is calculated by subtracting current liabilities from current assets. Therefore, the balance sheet provides the necessary information to calculate these solvency measures.

The Measures Most Often Used in Evaluating Solvency--The Current Ratio