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Question
Assertion (A): The ability of the business to pay the amount due to current liabilities as and when it is due is known as profitability.
Reason (R): Solvency of a business is determined by its ability to meet its contractual obligation towards long-term debts.
In the context of above two statements, choose the correct option from the following:
Options
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 correct, and Reason (R) is the correct explanation of Assertion (A).
Assertion (A) is correct, but Reason (R) is incorrect.
- Assertion (A) is incorrect, but Reason (R) is correct.
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Solution
Assertion (A) is incorrect, but Reason (R) is correct.
Explanation:
Assertion (A) is incorrect because the ability of a business to pay off its short-term current liabilities on time is called liquidity, whereas profitability refers to its capacity to earn profits. Meanwhile, Reason (R) is correct because a firm’s long-term financial stability and capacity to meet its long-term debt obligations is precisely defined as its solvency.
