Question

Assertion (A): Inventory and Prepaid Expenses are Current Assets but not Liquid Assets.

Reason (R): Inventory and Prepaid Expenses are not included in Liquid Assets because it takes time before inventory can be converted into cash and prepaid expenses cannot be converted into cash.

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 assertion is correct because inventory and prepaid expenses are classified as Current Assets but not Liquid (Quick) Assets. The reason is also correct since inventory takes time to convert into cash, but prepaid expenses cannot be transformed into cash at all. As a result, they are excluded from liquid assets, and their reasoning accurately explains the assertion.