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Question
Assertion (A): If Quick Ratio is 0.8 : 1, cash paid to trade payables will increase the quick ratio.
Reason (R): Quick Ratio will be reduced because both the liquid assets as well as current liabilities are decreased by the same amount.
In the context of the above two statements, which of the following is correct?
Options
(A) is correct but (R) is wrong.
Both (A) and (R) are correct.
(A) is wrong but (R) is correct.
Both (A) and (R) are wrong.
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Solution
(A) is wrong but (R) is correct.
Explanation:
If the Quick Ratio is less than one (0.8 : 1), paying cash to trade payables reduces both quick assets (cash) and current liabilities equally. In this situation, the ratio lowers rather than increases, because quick assets are already insufficient. Thus, the Assertion is wrong, but the Reason is correct.
