Match List – I with List – II. List – I List – II (A) Profitability R…

The correct answer is Option (2) → (A)-(IV), (B)-(I), (C)-(II), (D)-(III)

On the basis of the purpose for which they are computed, accounting ratios fall into four groups: liquidity, solvency, activity (turnover) and profitability ratios. Each group answers a different question about the business.

(A) Profitability Ratios — this matches (IV) It refers to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business. They measure the earning capacity of the business, for example the gross profit ratio and the return on investment.

(B) Activity Ratios — this matches (I) This refers to the ratios that are calculated for measuring the efficiency of operations of a business based on effective utilization of resources. They show how quickly assets are turned into sales, which is why they are also called turnover or efficiency ratios.

(C) Liquidity Ratios — this matches (II) The ability of a business to pay the amount due to stakeholders as and when it is due. They test the short-term position, for example the current ratio and the quick ratio.

(D) Solvency Ratios — this matches (III) The ability to meet its contractual obligations towards stakeholders, particularly towards external stakeholders. They test the long-term position, for example the debt-equity ratio.