Accountancy Part BAccounting Ratios

Identify the ratio which helps in the analysis of profit in relation…

Identify the ratio which helps in the analysis of profit in relation to revenue from operations or funds.

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Profitability Ratios

In the functional classification of ratios, profitability ratios relate profit to revenue from operations (gross profit ratio, net profit ratio, operating ratio) or to the funds employed (return on investment). They measure the earning capacity of the business.

Option (1) Solvency Ratio — Incorrect. Solvency ratios test the ability to meet long-term obligations.
Option (2) Liquidity Ratio — Incorrect. Liquidity ratios test the ability to pay short-term dues.
Option (4) Activity Ratio — Incorrect. Activity ratios measure how efficiently assets are turned into sales.

NCERT (2026-27 edition):
Profitability Ratios – “… It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business and the ratios calculated to meet this objective are known as ‘Profitability Ratios’.”