Accountancy Part BAnalysis of Financial Statements

Which technique is used to assess profitability, solvency and efficie…

Which technique is used to assess profitability, solvency and efficiency of an enterprise through the technique of ratio analysis?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Ratio Analysis

Ratio analysis relates items of the balance sheet and the statement of profit and loss to each other, which is how it measures profitability, solvency and efficiency. Trend analysis studies changes over years, cash flow analysis the movement of cash, and comparative statements the figures of two or more periods side by side.

NCERT (2026-27 edition):
Tools of Analysis of Financial Statements – “… Ratio Analysis: It describes the significant relationship which exists between various items of a balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the comparative significance of the individual items of the income and position statements. It is possible to assess the profitability, solvency and efficiency of an enterprise through the technique of ratio analysis.”