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Question
Which are the ratios that comes under Functional basis of classification?
Options
Liquidity Ratios
Solvency Ratios
Activity (or Turnover) Ratios and Profitability Ratios
All of the above
MCQ
Solution
All of the above.
Explanation:
The most widely used classification is the alternative classification (functional classification) depending on the reason for which a ratio is generated, which goes like this:
- Liquidity Ratios: Businesses require liquid finances to meet their obligations. The ability of a corporation to pay amounts owed to stakeholders on time is referred to as liquidity, and the ratios used to quantify it are referred to as 'Liquidity Ratios.' They are primarily of brief duration.
- Solvency Ratios: The ability of a firm to meet its contractual obligations to stakeholders, particularly external stakeholders, determines its solvency, and the ratios used to gauge solvency situation are known as 'Solvency Ratios.' They are essentially long- lasting in nature.
- Activity (or Turnover) Ratios: This refers to the ratios that are calculated to assess the effectiveness of a company's operations based on resource consumption. As a result, they're sometimes called 'efficiency ratios.'
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