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Question
Assertion (A): If Operating Profit Ratio is 20%, purchase of goods for ₹ 1,00,000 will decrease the ratio.
Reason (R): There will be equal increase in Purchases and Closing Inventory and hence Cost of Revenue from Operations remain unchanged. Since Revenue from Operations also does not change, the Operating Ratio will not change.
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.
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Solution
Only (R) is correct.
Explanation:
The purchase of goods has no effect on the Operating Profit Ratio unless they are sold. If goods worth ₹ 1,00,000 are purchased and not sold, both purchases and closing stock increase equally, resulting in an unchanged Cost of Revenue from Operations and revenue. Hence, the Operating Profit Ratio does not change.
