Question

Current ratio is

• A. Balance Sheet ratio
• B. Profit & Loss ratio
• C. Composite ratio
• D. None of these

Hint:

To classify any ratio, just look at the components in its formula. If all items are from the Balance Sheet, it's a Balance Sheet ratio (e.g., Current Ratio, Debt-Equity Ratio). If all are from P and L, it's a P and L ratio (e.g., Gross Profit Ratio). If it's a mix, it's composite (e.g., Return on Capital Employed, Turnover Ratios).

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks to classify the Current Ratio based on the financial statements from which its components are derived.
Step 2: Key Formula or Key Concept:
Financial ratios can be classified based on the source of their data:

Balance Sheet Ratios: Both the numerator and the denominator are items from the Balance Sheet.

Profit & Loss (P and L) Ratios: Both items are from the P and L Statement (Income Statement).

Composite (or Mixed) Ratios: One item is from the Balance Sheet, and the other is from the P and L Statement.

The formula for the Current Ratio is: \[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \] Step 3: Detailed Explanation:
Both 'Current Assets' and 'Current Liabilities' are line items that appear on the Balance Sheet. Since both components of the ratio are taken exclusively from the Balance Sheet, the Current Ratio is classified as a Balance Sheet ratio.
Step 4: Final Answer:
The Current Ratio is a Balance Sheet ratio. Therefore, (A) is the correct answer.