Question

Which of the following statements is correct?

[0.88 marks]

• A. Solvency ratio indicates a company’s cash availability to pay off its liabilities at a given point of time.
• B. Profitability ratio indicates the average profit earned by a business entity in the past five years.
• C. Activity ratio monitors the profit-earning capacity of a business entity.
• D. The ideal quick ratio is 1 : 1.

Answer 1

The correct option is D The ideal quick ratio is 1 : 1.

For a business entity, 1 : 1 is considered the ideal quick ratio . This indicates that the business entity’s quick assets are sufficient to cover its current liabilities.
Solvency ratio is used to measure the business entity’s ability to meet its long-term debt.
Profitability ratio assesses the business entity’s ability to earn profit from its operations.
Activity ratio measures how well the available resources have been used by the business entity.