Question

Assertion (A): Total Assets to Debt Ratio shows the financing of assets from Long-term Borrowings.

Reason (R): The formula for calculating the ratio is Total Assets/Debt. Thus, it shows Long-term Funds invested in the assets of the enterprise.

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 this ratio measures how much of the company’s assets are funded by long-term borrowings. Reason (R) is also correct and provides the right explanation because it states the actual formula ($\text{Total Assets} / \text{Debt}$), which directly shows how long-term debt is spread across total assets. The formula in the reason perfectly demonstrates the financing relationship mentioned in the assertion.