Question

Assertion (A): Liquidity Ratios are used to assess the short-term financial obligations of the firm.

Reason (R): Current Ratio and Acid-test Ratio are two liquidity ratios which measure the firm's ability to meet its current obligations in time.

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.

Answer 1

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

Explanation:

Liquidity ratios are used to determine if a company can meet its short-term liabilities on time. The Current Ratio and Acid-Test Ratio are liquidity ratios that assess the firm’s capacity to satisfy current obligations. As a result, both statements are correct, and the reasoning explains the assertion.