Question

Assertion (A): If the operating cycle of a business is 18 months, goods sold on credit period of 15 months will be classified as current assets.

Reason (R): An asset shall be classified as current asset if the period of the operating cycle of the business is of a period of more than 12 months.

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:

If the operating cycle is 18 months, then any asset (like goods sold on 15 months’ credit) that gets realized within this period is treated as a current asset.
This is because, as per Schedule III, an asset is current if it is expected to be realized within the operating cycle, even if that exceeds 12 months.