The liquidity and solvency of a company are measured by : (A) Current…

The liquidity and solvency of a company are measured by :

(A) Current ratio
(B) Profitability ratio
(C) Inventory Turnover ratio
(D) Debt Equity ratio
(E) Gross Profit ratio

Choose the correct answer from the options given below :

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → (A) and (D) only

Liquidity is the ability to meet short-term obligations; solvency is the ability to meet long-term obligations. Each has its own group of ratios.

(A) Current ratio — Correct. It compares current assets with current liabilities and is the main liquidity ratio.

(B) Profitability ratio — Incorrect. Profitability ratios measure earning capacity, not liquidity or solvency.

(C) Inventory Turnover ratio — Incorrect. It is an activity (turnover) ratio showing how fast inventory is sold.

(D) Debt Equity ratio — Correct. It compares long-term debt with equity and is the main solvency ratio.

(E) Gross Profit ratio — Incorrect. It is a profitability ratio.

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.”

NCERT (2026-27 edition):
Terms Introduced in the Chapter – “… Types of Ratios: There are many types of ratios, viz., liquidity, solvency, activity and profitability ratios. The liquidity ratios include current ratio and acid test ratio. Solvency ratios are calculated to determine the ability of the business to service its debt in the long run instead of in the short run. They include debt equity ratio, total assets to debt ratio, proprietary ratio and interest coverage ratio.”