8.14 current ratio: current assets/current liabilities. This ratio is used to show a business’s short-term liquidity, while also allowing comparisons to be made of different sized businesses.

8.15 Quick ratio: quick assets/current liabilities. This ratio is used to show potential liquidity problems, as it demonstrates the businesses short-term debt paying ability.

8.16 Financial flexibility is the ability of a business to adapt to change. It is important because it enable a business to increase or reduce its operating activities as needed.

8.17 Debt ratio: total liabilities/total assets. This is used to show the percentage of total assets provided by creditors. A higher debt ratio means lower financial flexibility as they can’t borrow money as easily to take advantage of business opportunities.

8.18 Return on total assets: net income+ interest expense/average total assets. This is used to show whether or not the business has used its resources efficiently, by comparing the amount of net income earned with the amount of total assets.

8.19 return on owners’ equity: net income/average owners equity. This relates to the return on total assets, as unlike that formula, return on owners equity does not include interest expense back to net income.

8.20 Operating capability refers to a business’s ability to sustain a given level of operations. Information about this is important in a business evaluating how well it’s maintaining its operating level, and in predicting future changes in its operating activity.

8.21 Inventory turnover: cost of goods sold/average inventory. A high inventory turnover is good because it means the business is more efficient in its purchasing and sales activities and the less cash it needs to invest in inventory.

8.22 accounts receivable turnover: net credit sales/average accounts receivable. A good accounts