Question

Assertion (A): Purchase of Stock-in-Trade on credit will not result in Flow of Cash or Cash Equivalents.

Reason (R): Purchase of Stock-in-Trade on credit does not involve cash.

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

Options

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

• Assertion (A) is correct, but Reason (R) is not correct.

• Assertion (A) is not correct, but Reason (R) is correct.

Answer 1

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

Explanation:

Assertion (A) is true because buying goods on credit means no cash is paid at the time of purchase, so there is no cash flow. Reason (R) is true and perfectly explains it because a credit transaction does not involve cash or cash equivalents at its inception, meaning the absolute movement of cash is exactly zero.