Make the right combination of the ratios that enables to find the sho…

Make the right combination of the ratios that enables to find the short term liquidity.

(a) Return on Equity

(b) Acid Test Ratio

(d) Sacrificing Ratio

(e) Inventory Turnover Ratio

Choose the most appropriate answer from the options given below :

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → (b) and (c) only

Short-term liquidity is the firm’s ability to pay its current liabilities on time. The ratios that measure it compare current assets (or quick assets) with current liabilities. These are the liquidity ratios.

(a) Return on Equity — Incorrect. It is a profitability ratio. It shows the profit earned on the shareholders’ funds, not the ability to pay current liabilities.

(b) Acid Test Ratio — Correct. It is the quick (liquid) ratio: quick assets divided by current liabilities. It leaves out inventories and prepaid expenses, so it is a stricter test of liquidity.

(c) Current Ratio — Correct. It compares all current assets with current liabilities. It shows how far current assets cover the short-term obligations.

(d) Sacrificing Ratio — Incorrect. It is not an accounting ratio at all. It is the ratio in which old partners give up their share of profit to a new partner.

(e) Inventory Turnover Ratio — Incorrect. It is an activity (turnover) ratio. It shows how fast inventory is sold, that is, how well a resource is used.

Note: Return on Equity, in item (a), is not in the NCERT Accountancy textbook; it is explained here for the benefit of the students.

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.”

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. Because of exclusion of non-liquid current assets it is considered better than current ratio as a measure of liquidity position of the business. It is calculated to serve as a supplementary check on liquidity position of the business and is therefore, also known as ‘Acid-Test Ratio’.”

NCERT (2026-27 edition):
Terms Introduced in the Chapter – “… 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. The turnover ratios basically exhibit the activity levels characterised by the capacity of the business to make more sales or turnover and include Inventory Turnover, Trade Receivables Turnover, Trade Payables Turnover, Working Capital Turnover, Fixed Assets Turnover and Current assets Turnover.”