Question

Assertion (A): If Current Ratio is 1.5 : 1, purchase of Loose Tools for cash will not reduce the Current Ratio because one Current Asset (cash) is replaced by another Current Asset (Loose Tools).

Reason (R): Purchase of Loose Tools will reduce the Current Ratio because Looses Tools are not included in Current Assets.

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

Only (R) is correct.

Explanation:

Loose tools are typically handled as inventory (current asset) only when they are small consumable products. However, in many ratio enquiries, Loose Tools are classified as non-current assets (fixed assets).