Which involves examining the relationships between financial figures and expressing them as ratios or percentages?

Which involves examining the relationships between financial figures and expressing them as ratios or percentages?

• A. The trading account
• B. The balance sheet
• C. Liquidity
• D. Ratio analysis

Answer: (D)

Ratio analysis involves examining the relationships between financial figures and expressing them as ratios or percentages. It uses data from financial statements to compute measures like current ratios, gross margin percentages, return on assets, and debt-to-equity ratios. This approach helps you see how well a business is performing beyond raw totals, compare performance over time, and benchmark against others. The other items refer to specific statements or concepts: a trading account shows revenue and costs to calculate gross profit; a balance sheet lists assets, liabilities, and equity; and liquidity is about a company’s ability to meet short-term obligations, which can be analyzed with ratios but is not the process itself. So the activity described is ratio analysis.

Ratio analysis involves examining the relationships between financial figures and expressing them as ratios or percentages. It uses data from financial statements to compute measures like current ratios, gross margin percentages, return on assets, and debt-to-equity ratios. This approach helps you see how well a business is performing beyond raw totals, compare performance over time, and benchmark against others. The other items refer to specific statements or concepts: a trading account shows revenue and costs to calculate gross profit; a balance sheet lists assets, liabilities, and equity; and liquidity is about a company’s ability to meet short-term obligations, which can be analyzed with ratios but is not the process itself. So the activity described is ratio analysis.