Question

Assertion (A): The ability of the business to pay the amount due to current liabilities as and when it is due is known as profitability.

Reason (R): Solvency of a business is determined by its ability to meet its contractual obligation towards long-term debts.

In the context of above two statements, choose the correct option from the following:

विकल्प

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

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (A).

• Assertion (A) is correct, but Reason (R) is incorrect.

• Assertion (A) is incorrect, but Reason (R) is correct.

   

Answer 1

Assertion (A) is incorrect, but Reason (R) is correct.

Explanation:

Assertion (A) is incorrect because the ability of a business to pay off its short-term current liabilities on time is called liquidity, whereas profitability refers to its capacity to earn profits. Meanwhile, Reason (R) is correct because a firm’s long-term financial stability and capacity to meet its long-term debt obligations is precisely defined as its solvency.