Question

Match the following

a. Test of Liquidity	1. ROI
b. Test of Solvency	2. Acid test ratio
c. Test of Activity	3. Debt to Equity
d. Test of Profitability	4. Debtors Turnover ratio

• A. a-2, b-3, c-4, d-1
• B. a-2, b-3, c-1, d-4
• C. a-1, b-2, c-3, d-4
• D. a-4, b-3, c-2, d-1

Answer 1

Answer: (A)

a-2, b-3, c-4, d-1

1. Acid test ratio or Quick ratio is a much more conservative ratio than Current ratio. It measures the ability of the company to pay the current debts immediately and hence is a 'Test of Liquidity'.
2. Debt to Equity ratio measures the mix of Debt and Equity funds in the company. This gives an idea regarding the solvency of the company. A high ratio points to less protection to the creditors and vice versa.
3. Activity ratios are used to measure the efficiency of the firm at managing various resources.Debtors turnover ratio measures the efficiency with which the company manages its receivables and hence is a test of activity or activity ratio.
4. ROI ( Return On Investment ) calculates the percentage return on the funds invested in the company and hence shows the profitability of the company.