Accountancy Part BAccounting Ratios

To measure the short term financial position __________ ratio can be…

On the basis of the following information, answer the question :

Particulars	Amount (Rs.)
Share Capital :
Equity share capital (Rs. 10 each)	12,00,000
12% Preference share capital	3,00,000
Reserves & Surplus	5,00,000
10% Debentures	12,00,000
Current Liabilities	3,00,000
Fixed Assets	28,00,000
Current Assets	7,00,000
Net profit after tax as per Statement of
Profit & Loss	4,50,000
Tax	1,50,000
Market Price of the Share	34

To measure the short term financial position __________ ratio can be calculated.

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Current Ratio

The short-term financial position of a business is its ability to pay its current liabilities out of its current assets. Such ratios are called liquidity ratios, and the main one is the current ratio (current assets ÷ current liabilities).

Option (1) Gross Profit Ratio — Incorrect. It is a profitability ratio: gross profit compared with revenue from operations.

Option (2) Current Ratio — Correct. It compares current assets with current liabilities, so it measures short-term solvency.

Option (3) Total Assets to Debt Ratio — Incorrect. It is a solvency ratio that looks at long-term debt.

Option (4) Proprietary Ratio — Incorrect. It is a solvency ratio: shareholders’ funds compared with capital employed or total assets.

NCERT (2026-27 edition):
Liquidity Ratios – “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.”