Question

Assertion (A): An ideal Current Ratio is 2 : 1.

Reason (R): Current Ratio of 2 : I indicates that Current Assest of a business should, at least, be twice of its Current Liabilities, so that if half the amount is realised from current assests on time, the firm can still meet its current liabilities in full.

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

Options

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

• Both (A) and (R) are correct but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

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

Explanation:

By convention, a current ratio of 2 : 1 is treated as “ideal” because current assets (which include inventory and receivables) are not always fully realisable on short notice; if only about half of those current assets can be realised quickly, having twice the current liabilities in current assets still lets the firm meet its short‑term obligations.