Question

Current ratio is —

• A. Balance sheet ratio
• B. Profit & loss ratio
• C. Composite ratio
• D. None of these

Hint:

The Current Ratio helps assess liquidity; a ratio of 2:1 is generally considered ideal.

Answer 1

The Correct Option is A

Step 1: Meaning of Current Ratio.
The current ratio measures a company’s ability to pay short-term obligations with its short-term assets.
It is calculated as:
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]
Step 2: Classification of Ratios.
Accounting ratios are generally divided into:
- Balance Sheet Ratios (derived from Balance Sheet items).
- Income Statement Ratios (from Profit & Loss accounts).
- Composite Ratios (from both Balance Sheet and P and L items).
Since the current ratio uses only Balance Sheet items (current assets and current liabilities), it is a Balance Sheet Ratio.
Step 3: Analysis of options.
- (1) Balance sheet ratio: Correct — both numerator and denominator come from the Balance Sheet.
- (2) Profit & loss ratio: Incorrect — it involves income or expenditure accounts.
- (3) Composite ratio: Incorrect — not a mix of P and L and Balance Sheet items here.
- (4) None of these: Incorrect — option (1) fits correctly.
Step 4: Conclusion.
Hence, the Current ratio is a Balance Sheet Ratio.