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.
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.
