Question

Assertion (A): Profitability Ratios are calculated to analyse the earning capacity of the business.

Reason (R): Profitability Ratios are calculated to determine the ability of the business to service its debt in the long run.

In the context of the above two statements, which of the following is correct?

Options

• Assertion (A) is correct, but Reason (R) is wrong.

• Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are incorrect.

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (A).

Answer 1

Assertion (A) is correct, but Reason (R) is wrong.

Explanation:

The assertion statement is entirely accurate because the primary objective of computing Profitability Ratios (such as Gross Profit or Net Profit ratio) is to evaluate and analyze the earning efficiency and financial capacity of a business. However, the reason statement is factually incorrect because the ability of a business to meet and service its long-term debt obligations is measured by Solvency Ratios (like Debt-to-Equity or Interest Coverage ratios), rather than profitability metrics.