Question

Assertion (A): Decreasing the value of closing inventory decreases profit.

Reason (R): Decrease in the value of closing inventory increases the cost of revenue from operations.

In the light of the above statements, choose the most appropriate answer from the options given below:

Options

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

• Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).

• (A) is correct but (R) is not correct.

• (A) is not correct but (R) is correct.

Answer 1

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

Explanation:

Closing inventory is deducted when calculating the cost of revenue from operations (COGS). If inventory decreases, COGS increases and reduces gross and overall profit. As a result, both assertion and reasoning are correct, and reasoning correctly explains assertion.