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Question : Assertion: If the Current Ratio is 5: 1, the purchase of goods of Rs.60,000 on credit will reduce the ratio.
Reason (R): Current assets (Goods) and Current Liabilities will both rise as a result of the credit purchase of goods for Rs.50,000. (Creditors). As a result, the Current Ratio will rise.

Option 1: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)

Option 2: Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)

Option 3: Assertion (A) is true but Reason (R) is False

Option 4: Assertion (A) is False and Reason (R) is True.


Team Careers360 23rd Jan, 2024
Answer (1)
Team Careers360 24th Jan, 2024

Correct Answer: Assertion (A) is true but Reason (R) is False


Solution : If the current ratio is 2:1, a corresponding rise in both current assets and liabilities would result in a reduction in the current ratio.
Let's use an illustration to better grasp this;
Current Liabilities are Rs. 50000 and Current Assets are Rs. 100000.
Current ratio is equal to Current Assets / Current Liabilities, or 100,000/50,000, or 2:1.

Now increase both with 50,000

then, Current ratio = 150000/100000 = 1.5:1
Hence it will be reduced so option 3 is the correct answer.

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