Match List-I with List-II.

Choose the correct answer from the options given below:

(A)-(IV), (B)-(III), (C)-(II), (D)-(I)

The correct answer is option 2- (A)-(IV), (B)-(III), (C)-(II), (D)-(I).

(A) Measure of liquidity- (IV) Current ratio.
Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. These are analysed by looking at the amounts of current assets and current liabilities in the balance sheet. The two ratios included in this category are current ratio and liquidity ratio. Current ratio is the proportion of current assets to current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. The ratio should be reasonable. It should neither be very high or very low.

(B) Measure of earning capacity- (III) Profitability ratio.
The profitability or financial performance is mainly summarised in the statement of profit and loss. Profitability ratios are calculated to analyse the earning capacity of the business which is the outcome of utilisation of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilised.

(C) Measure of activity of firm's inventory- (II) Inventory turnover ratio.
Inventory Turnover Ratio determines the number of times inventory is converted into revenue from operations during the accounting period under consideration. It expresses the relationship between the cost of revenue from operations and average inventory. It studies the frequency of conversion of inventory of finished goods into revenue from operations. It determines how many times inventory is purchased or replaced during a year. Low turnover of inventory may be due to bad buying, obsolete inventory, etc., and is a danger signal. High turnover is good but it must be carefully interpreted as it may be due to buying in small lots or selling quickly at low margin to realise cash. Thus, it throws light on utilisation of inventory of goods.

(D) Measure of Productive efficiency of funds- (I) Return on capital employed.
Return on Capital Employed explains the overall utilisation of funds by a business enterprise. It measures return on capital employed in the business. It reveals the efficiency of the business in utilisation of funds entrusted to it by shareholders, debenture-holders and long-term loans. For inter-firm comparison, return on capital employed funds is considered a good measure of profitability. It also helps in assessing whether the firm is earning a higher return on capital employed as compared to the interest rate paid.