Question

Assertion (A): ‘Redemption of Debentures’ will result in an outflow of cash.

Reason (R): Redemption of Debentures decreases Cash and Cash Equivalents.

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 the redemption of debentures means the company is paying back its long-term debt, which requires an actual payment to bondholders, leading to an outflow of cash. Reason (R) is also true and directly explains it because whenever cash is paid out to settle a liability, it directly decreases the total cash and cash equivalents balance of the company.