Question

Assertion (A): Operating Ratio is a measurement of the operating efficiency and profitability of the enterprise.

Reason (R): Operating Ratio indicates the percentage of Revenue from Operations absorbed by the Cost of Revenue from Operations. Lower the operating ratio, the better it is, because it means operating Cost is less.

In the context of the above two statements, which of the following is correct?

विकल्प

• Both (A) and (R) are true, but (R) is not the correct explanation of (A).

• Both (A) and (R) are true and (R) is the correct explanation of (A).

• Both (A) and (R) are false.

• (A) is false, but (R) is true.

Answer 1

Both (A) and (R) are true and (R) is the correct explanation of (A).

Explanation:

The Operating Ratio shows the proportion of revenue consumed by operating costs, thereby measuring operating efficiency and, indirectly, profitability. It is the percentage of revenue absorbed by cost of revenue from operations and operational expenses; thus, a lower operating ratio is preferable because it results in a higher operating profit. As a result, both the assertion and the reasoning are correct, and the reason accurately explains the assertion.