Question

Which one of the following is correct?
i) A ratio is an arithmetical relationship of one number to another number.
ii) Quick ratio is also known as acid test ratio.
iii) Rule of thumb for current ratio is $2:1$.
iv) Debt equity ratio is the relationship between outsiders fund and shareholders fund.

• A. All (i), (ii), (iii) and (iv) are correct.
• B. Only (i), (ii) and (iii) are correct.
• C. Only (ii), (iii) and (iv) are correct.
• D. Only (ii) and (iii) are correct.

Answer 1

The correct option is A All (i), (ii), (iii) and (iv) are correct.

1. A ratio is an arithmetical relationship of one number to another number. in terms of accountancy, an accountancy ratio would be the relationship between two figures obtained from the account statement. For example Net profit ratio is the ratio of Net profit to the Net sales made.
2. Quick ratio is also known as acid test ratio because it measures the ability of the company to meet unexpected liabilities without having to depend on the sale of inventories.
3. The rule of thumb for current ratio is $2:1$, this is not a constant rule but rather relative. Whether or not the current ratio is satisfactory completely depends on the nature of business, current assets and current liabilities
4. Debt equity ratio is calculated as Total outside liabilities/ Shareholders equity and so it can be said that it is the relationship between outsiders fund and shareholders funds.