Question : Assertion (A): Current Assets/Current Liabilities is the formula for calculating the current ratio
Reason (R): The current ratio is derived by dividing current assets by current liabilities. Current assets are made up of spare parts, loose tools, and stores.
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 False.
Correct Answer: Assertion (A) is true but Reason (R) is False
Solution :
By dividing current assets by current liabilities, the current ratio is determined.
Because they are not held with the intention of being converted into cash and cash equivalents, loose tools, stores, and spares are excluded from current assets for determining liquidity ratios.
Hence option 3 is the correct answer.
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