Question

Assertion (A): While calculating Trade Receivables Turnover Ratio, Provision for Doubtful Debts is not deducted from Trade Receivables.

Reason (R): Provision for Doubtful Debts is not deducted from Trade Receivables because if it is deducted than Trade Receivables will be reduced which will give a higher Trade Receivables Turnover Ratio and it will give a false impression that Trade Receivables are being collected quickly.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are true, but (R) is not the correct explanation of (A).

• Both (A) and (R) are true and (R) is the correct explanation of (A).

• Both (A) and (R) are false.

• (A) is true, but (R) is false .

Answer 1

Both (A) and (R) are true and (R) is the correct explanation of (A).

Explanation:

The Trade Receivables Turnover Ratio is calculated using gross trade receivables, so the allowance for doubtful debts is not excluded. If it is deducted, receivables will decrease and the turnover ratio will increase artificially, creating the false impression of speedier collection. As a result, both (A) and (R) are true, and (R) correctly explains (A).