Which one of the following statements is true?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Solvency ratio is a part of long term solvency

Ratios are grouped by purpose. Liquidity ratios test the ability to pay short-term dues, while solvency ratios test the ability to meet long-term obligations, so solvency ratios belong to long-term solvency.

Option (1) Liquidity ratios measure long term solvency of a concern. — Incorrect. Liquidity ratios (current ratio, liquid ratio) are short-term in nature.

Option (2) Solvency ratio is a part of long term solvency — Correct. Debt-equity, proprietary and interest coverage ratios judge the firm's long-term position.

Option (3) Stock is part of liquid assets. — Incorrect. Liquid assets are current assets minus inventories and prepaid expenses; stock is left out because it takes time to turn into cash.

Option (4) Gross profit ratio measures overall profitability of a concern. — Incorrect. The gross profit ratio shows only the margin on goods sold; overall profitability is judged by the net profit ratio, which comes after all expenses.

NCERT (2026-27 edition):
Types of Ratios – “… Liquidity Ratios: To meet its commitments, business needs liquid funds. The ability of the business to pay the amount due to stakeholders as and when it is due is known as liquidity, and the ratios calculated to measure it are known as ‘Liquidity Ratios’. These are essentially short-term in nature. Solvency Ratios: Solvency of business is determined by its ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders, and the ratios calculated to measure solvency position are known as ‘Solvency Ratios’. These are essentially long-term in nature.”

NCERT (2026-27 edition):
Quick or Liquid Ratio – “… The quick assets are defined as those assets which are quickly convertible into cash. While calculating quick assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, etc., from the current assets.”

NCERT (2026-27 edition):
Net Profit Ratio – “… Generally, net profit refers to profit after tax (PAT). Significance: It is a measure of net profit margin in relation to revenue from operations. Besides revealing profitability, it is the main variable in computation of Return on Investment. It reflects the overall efficiency of the business, assumes great significance from the point of view of investors.”