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Question
Assertion (A): If Current Ratio is 2 : 1, bill receivable endorsed to a creditor will improve the ratio.
Reason (R): Current Ratio will improve because both the Current Assets as well as Current Liabilities are decreased by the same amount.
In the context of the above statements, which one 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.
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Solution
Both (A) and (R) are true and (R) is the correct explanation of (A).
Explanation:
When a bill receivable is endorsed to a creditor, both current assets and current liabilities decrease by the same amount. This transaction increases the current ratio, which is already 2 : 1 (greater than 1). As a result, both Assertion and Reason are true, and Reason accurately explains Assertion.
