Question

Given below are two statements:
Statement I: The rate of return on investment ratio gives the net return on capital for every rupee of average capital invested.
Statement II: Capital turnover ratio gives the gross income obtained for each rupee of capital invested over the year.
In the light of the above statements, choose the most appropriate answer from the options below:

• A. Both statements I and II are true
• B. Both statements I and II are false
• C. Statement I is correct but statement II is false
• D. Statement I is incorrect but statement II is true

Hint:

"Rate of Return" is always concerned with "Net" profits, whereas "Turnover" is concerned with "Gross" income or sales volume relative to assets or capital.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Financial ratios are analytical tools used to evaluate the profitability, efficiency, and financial health of a business or farm enterprise.

Step 2: Detailed Explanation:
Let us analyze the definitions of both ratios:
- Statement I: The Rate of Return on Investment (ROI) measures profitability by comparing net returns (profits) to the capital invested:
\[ \text{ROI} = \frac{\text{Net Returns}}{\text{Average Capital Invested}} \]
This ratio shows the net return on capital earned for every single rupee of average capital invested. This statement is correct.
- Statement II: The Capital Turnover Ratio is an efficiency ratio that measures how effectively a business uses its capital to generate revenue:
\[ \text{Capital Turnover Ratio} = \frac{\text{Gross Income}}{\text{Total Capital Invested}} \]
This ratio indicates the gross income generated per rupee of capital invested over the year. This statement is correct.
Therefore, both statements are correct.

Step 3: Final Answer:
Both statements I and II are true, corresponding to Option (A).