Question

Assertion (A): If Operating Ratio is 75%, purchase of goods of ₹ 1,00,000 will not change the ratio.

Reason (R): There will be equal increase in Purchases and Closing Inventory and hence the Cost of Revenue from Operations and Operating Ratio will remain unchanged.

In the context of the above two statements, which 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.

Answer 1

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

Explanation:

The purchase of goods increases purchases while also increasing closing inventory by the same amount (if goods stay unsold). Since Cost of Revenue from Operations = Opening Stock + Purchases − Closing Stock, an increase in purchases is offset by an increase in closing stock, resulting in an unchanged cost. Hence, the Operating Ratio remains unchanged. As a result, both Assertion and Reason are true, and Reason correctly explains Assertion.