Question

Assertion (A): Analysis of Financial Statements helps in assessing the present earning capacity as well as the future earning capacity.

Reason (R): With the help of Financial Statement analysis profitability can be assessed with reference to sales as well as capital invested in the business.

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

Options

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

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

• Assertion (A) is correct, but Reason (R) is not correct.

• Both Assertion (A) and Reason (R) are not correct.

Answer 1

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

Explanation:

Assertion (A) is correct because evaluating current and future profitability trends is a primary objective of financial analysis. Reason (R) is also correct and provides the exact logical explanation because analysing net profit margins against sales (turnover) and return on capital invested (ROI) provides the precise quantitative data needed to judge the company's core earning power.