3) The statement of financial position can be used to assess thefollowing aspects of...

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Accounting

3) The statement of financial position can be used to assess thefollowing aspects of the reporting entity:
• liquidity
• asset mix
• financial structure(solvency).
(a) What do these terms mean?
(b) How could they be assessed fromthe statement of financial position figures?
(c) Which external stakeholderswould have an interest in each aspect?

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A Liquidity This play a key role inassessing the shortterm financial position of a businessCommercial banks and other shortterm creditors are generallyinterested in such an analysisSolvency Solvency is a key metric used to measure anenterprises ability to meet its debt and otherobligations The solvency ratio indicates whether a companys cashflow is sufficient to meet its shortterm and longtermliabilities The lower a companys solvency ratio the greater theprobability that it will default on its debt obligationsThe measure is usually calculated as followsHowever it is a comprehensive measure of solvency as itmeasures cash flow rather than net income by includingdepreciation to assess a companys capacity to stay afloat Itmeasures this cash flow capacity in relation to all liabilitiesrather than only shortterm debt This way solvency assesses acompanys longterm health by evaluating its longterm debt and See Answer

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In: Accounting3) The statement of financial position can be used to assess thefollowing aspects of the...3) The statement of financial position can be used to assess thefollowing aspects of the reporting entity:• liquidity• asset mix• financial structure(solvency).(a) What do these terms mean?(b) How could they be assessed fromthe statement of financial position figures?(c) Which external stakeholderswould have an interest in each aspect?