Question : Assertion (A): Payment of the Rs.10,000 current liability will raise the Current Ratio if it is now 2:1.
Reason (R): Paying down an Rs.10,000 current liability will result in a Rs. 10,000 reduction in both current assets (cash) and current liabilities. As a result, the current ratio will drop.
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 :
When the denominator and the numerator are reduced by the same amount and the current ratio is greater than one. The numerator is proportionally lowered less than the denominator, which is already smaller than it.
The overall ratio will therefore increase.
Hence option 3 is the correct answer.
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