Question

Assertion (A): The Proprietary Ratio shows the proprietor’s funds invested in total assets.

Reason (R): The formula for calculating the ratio is Proprietors’ Funds/Total Assets. Thus, it shows the investment of Proprietors’ Funds in total assets.

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 (А).

• Assertion (A) is correct, and Reason (R) is incorrect.

• 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 (А).

Explanation:
Assertion (A) is correct because the Proprietary Ratio highlights the relationship between owners’ equity and the firm’s total resources, showing how much of the assets are funded by the proprietors. Reason (R) is also correct and provides the right explanation because it presents the explicit formula ($\text{Proprietors' Funds} / \text{Total Assets}$), which mathematically proves how the ratio measures that investment.