Question

Assertion (A): Activity Ratio indicate how efficiently the Working Capital and Inventory are being used by the firm.

Reason (R): Activity Ratio, i.e. Inventory Turnover Ratio, Trade Receivables Turnover Ratio, Trade Payables Turnover Ratio and Working Capital Turnover Ratio indicate how efficiently the Working Capital and Inventory were used during the year.

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

Options

• 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:

Activity ratios measure how efficiently a company uses its resources, such as working capital and inventories. Inventory Turnover, Receivables Turnover, Payables Turnover, and Working Capital Turnover ratios demonstrate the efficiency with which resources are utilised during the year. As a result, both Assertion and Reason are true, and Reason correctly explains Assertion.