Question

Assertion (A): The biggest drawback of the Current Ratio is that it is susceptible to ‘window-dressing’.

Reason (R): Current Ratio of more than 1 : 1 can be improved by an equal decrease in both Current Assets and Current Liabilities. Hence, it is liable to be affected by window-dressing.

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 Assertion (A) is correct since the Current Ratio can be easily changed at the conclusion of the accounting period by displaying more current assets or less current liabilities. The Reason (R) is also true since when the current ratio exceeds 1 : 1, the ratio can be improved by reducing both current assets and current liabilities by the same amount (for example, paying off creditors with cash). This alteration is known as window-dressing, and the reasoning accurately explains the assertion.