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Question
Assertion (A): If Current Ratio is 2 : 1, purchase of goods of ₹ 1,00,000 on credit will reduce the ratio.
Reason (R): Purchase of goods on credit will result in increase in both Current Assets as well as Current Liabilities by the same amount. Thus, Current Ratio will improve.
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 (A) is correct.
Both (A) and (R) are wrong.
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Solution
Only (A) is correct.
Explanation:
When goods are purchased on credit, both current assets (stock) and current liabilities (creditors) increase proportionally. If the current ratio is 2:1, an equivalent increase reduces it (for example, 2 : 1 becomes 1.5 : 1). Hence, the assertion is correct.
