(i) Long-term solvency means the firm's ability to meet its liabilities in the long run.
(ii) Long term solvency ratios help to determine the ability of the business to repay its debts in the long run.
(iii) The following ratios are normally computed for evaluating long term solvency of the business:
(i) Debt equity ratio
(ii) Proprietary ratio
(iii) Capital gearing ratio

Following are the limitations of ratio analysis:
(i) Accuracy of financial information : The accuracy of a ratio depends on the accuracy of information taken from financial statements.
(ii) Consistency in preparation of financial statements: Inter-firm comparisons with the help of ratio analysis will be meaningful only if the firms follow uniform accounting procedures consistently.
(iii) Non-availability of standards or norms: Ratios will be meaningful only if they are compared with accepted standards or norms. Only few financial ratios have universally recognised standards.
(iv) Change in price level : Ratio analysis may not reflect price level changes and current values as they are calculated based on historical data given in financial statements.

Ratio will increases as both the quick assets and current liabilities i.e., cash and creditors, will decreases by the same amount.

Current ratio = \(\frac{Current\ assets}{Current\ liabilities}\) = \(\frac{8,00,000}{4,00,000}\) = 2:1
Current assets = Current investments + Inventories + Trade receivables + Cash and cash equivalents + Prepaid expenses
= 80,000 + 1,60,000 + 4,00,000 + 1,20,000 + 40,000 = Rs.8,00,000
Current liabilities = Trade creditors + Bills payable + Expenses payable
= 1,60,000 + 1,00,000 + 1,40,000 = Rs.4,00,000
(ii) Quick ratio
Quick ratio gives the proportion of quick assets to current liabilities. It indicates whether the business concern is in a position to pay its current liabilities as and when they become due, out of its quick assets. Quick assets are current assets excluding inventories and prepaid expenses. It is otherwise called liquid ratio or acid test ratio. It is calculated as follows:
Quick ratio = \(\frac{Quick\ assets}{Current\ liabilities}\)
Quick assets = Current assets – Inventories – Prepaid expenses
Higher the quick ratio, better is the short-term financial position of an enterprise.

Current ratio = \(\frac { Current\ assets }{ Current\ liabilities } \)
Current assets = Current investments + Inventories + Bills receivables + Trade debtors + Cash and cash equivalents
= Rs.40,000 + Rs.2,00,000 + Rs.1,20,000 + Rs. 80,000 + Rs.10,000
= Rs.4,50,000
Current liabilities = Trade creditors + Bills payable + Expenses payable
= Rs.80,000 + Rs.50,000 + Rs.20,000 = Rs.1,50,000
Current ratio = \(\frac { 4,50,000 }{ 1,50,000 } \) = 3:1

Trade payables turnover ratio = \(\frac { Net\quad credit\quad purchases }{ Average\quad trade\quad payables } \)
Average trade payables = \(\frac { Opening\quad trade\quad payables+Closing\quad trade\quad payables }{ 2 } \)
= \(\frac { (20,000+4,000)+(10,000+6,000) }{ 2 } \)
= \(\frac { 40,000 }{ 2 } \) = Rs.20,000
Average payment period (in days) = \(\frac { Number\quad of\quad days\quad in\quad a\quad year }{ Trade\quad payables\quad turn\quad over\quad ratio } \)
=\(\frac { 365 }{ 5 } \)  = 70 days
∴ Trade payables turnover ratio (in days) = \(\frac { 1,00,000 }{ 20,000 } \) = 5 times.

Quick ratio = \(\frac { Quick\quad assets }{ Current\quad liabilities } \)
Quick assets = Current assets - Inventories - Prepaid expenses
= Rs.4,00,000 + Rs.70,000 - Rs.30,000 = Rs.3,00,000
∴ Quick ratio = \(\frac { 3,00,000 }{ 2,00,000 } \) = 1.5:1

(i) Inventory turnover ratio = \(\frac{Cost\ of\ revenue\ from\ operations}{Average\ inventory}\) = \(\frac{6,00,000}{1,20,000}\) = 5 times
Average inventory = \(\frac{Opening\ inventory + Closing\ inventory}{2}\)
= \(\frac{1,40,000 + 1,00,000}{2}\)= \(\frac{2,40,000}{2}\)= Rs. 1,20,000
(ii) Trade receivables turnover ratio = \(\frac{Credit\ revenue\ from\ operations}{Average\ trade\ receivables}\)
= \(\frac{10,50,000}{70,000}\) = 15 times
Average trade receivables = \(\frac{Opening\ trade\ receivables + Closing\ trade\ receivables}{2}\)
= \(\frac{80,000 + 60,000}{2}\) =\(\frac{1,40,000}{2}\)= Rs.70,000
(iii) Creditors payables turnover ratio = \(\frac{Net\ credit purchases}{Average\ trade\ payables}\) = \(\frac{4,50,000}{45,000}\)= 10 times
Average trade payables = \(\frac{Opening\ trade\ payables + Closing\ trade\ payables}{2}\)
= \(\frac{40,000 + 50,000}{2}\) = \(\frac{90,000}{2}\) = Rs. 45,000
(iv) Fixed assets turnover ratio = \(\frac{Revenue\ from\ operations}{Average\ xed\ assets}\)= \(\frac{10,50,000}{5,25,000}\) = 2 times
Average fixed assets = \(\frac{Opening\ fixed\ assets + Closing\ fixed\ assets}{2}\)
= \(\frac{5,50,000 + 5,00,000}{2}\) = \(\frac{10,50,000}{2}\)= Rs. 5,25,000

Sacrificing ratio
Reason: Sacrificing ratio is the proportion of the profit which is sacrificed or foregone by the old partners in favour of the new partner. Other three are functional classification of ratio analysis.

Quick ratio = \(\frac { Current\quad assets }{ Current\quad liabilities } \).

Both (A) and (R) are true and (R) is the correct explanation of (A)