Question

Assertion (A): Operating Cycle is the time between the acquisition of assets for processing and their realisation in Cash.

Reason (R): In case operating cycle cannot be identified, it is assumed to have a duration of twelve months.

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:

The operating cycle is defined as the time between the acquisition of assets for processing and their realization in cash or cash equivalents. If the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months. This assumption helps in classifying current and non-current assets and liabilities properly in financial reporting, as stated under Schedule III accounting standards.