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

C. Sacrificing Ratio

D. Inventory Turnover Ratio

E. Current Ratio

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → B and E only

Short-term liquidity is the firm's ability to meet its current obligations, so it is measured by ratios that compare current assets with current liabilities.

A. Return on Equity Incorrect. Not a liquidity ratio. It measures the profit earned for the shareholders, a profitability ratio.
B. Acid Test Ratio Correct. A liquidity ratio. It is the quick ratio: quick assets (current assets less inventories and prepaid expenses) to current liabilities.
C. Sacrificing Ratio Incorrect. Not a liquidity ratio. It is a partnership ratio showing the share of profit the old partners give up on admission.
D. Inventory Turnover Ratio Incorrect. Not a liquidity ratio. It is an activity (turnover) ratio showing how fast inventory is sold.
E. Current Ratio Correct. A liquidity ratio. It compares current assets with current liabilities.

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.”

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. 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’.”