Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Accounting Ratios

Question:

What is disclosed by the solvency ratio?

Options:

Meet interest cost regularly

Long-term indebtedness at maturity

Both options 1 and 2

Either option 1 or 2

Correct Answer:

Both options 1 and 2

Explanation:

The company's ability to "meet interest cost regularly" is related to the Interest Coverage Ratio. If the company has a healthy interest coverage ratio, it means the company generates enough operating income to cover its interest payments regularly, ensuring that it can meet its interest costs on time. "Long-term indebtedness at maturity is disclosed by the solvency ratio," may be referring to the Debt-to-Equity Ratio. The D/E ratio gives an indication of the company's long-term indebtedness, as it shows the proportion of total debt relative to shareholders' equity. A higher D/E ratio implies that the company has a higher level of long-term debt compared to its equity, which may pose a higher financial risk. These both ratios are solvency ratios. In conclusion, the statement appears to emphasize the importance of monitoring both the Interest Coverage Ratio and the Debt-to-Equity Ratio to assess a company's financial health, its ability to meet interest payments, and its long-term indebtedness position. These ratios are crucial for understanding a company's solvency and financial risk profile.