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.
Question : Assertion (A): The sale of items for Rs. 25,000 (cost: Rs. 20,000) in cash will lower the ratio if the current ratio is 2:1. Reason (R): Selling goods for Rs.25,000 will result in a Rs.25,000 gain in current assets (Cash/Trade Debtors) and a Rs.20,000 decrease in current
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,
Question : Assertion (A): If Trade Payables are Rs.80,000, Working Capital is Rs.16,00,000, and Current Liabilities are Rs.6,00,000, the Current Ratio will be 2:1. Reason (R): Current Ratio = Current Assets/Current Liabilities
Question : Assertion (A): If working capital is Rs. 2,40,000, current assets are Rs. 4,000,00, which includes Rs. 2,000 in inventory. There will be a current ratio of 2.5:1. Reason (R): Current Ratio = Current Assets/Current Liabilities
Question : Assertion (A): The redemption of Rs.2,000,000 in debentures will lower the ratio if the current ratio is 2:1. Reason (R): Current liabilities are debentures redeemable within a year or within the operating cycle from the date of the balance sheet. As a result, the drop
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