Question

Assertion (A): Working capital should be optimum, so that neither profitability nor liquidity is affected.

Reason (R): If working capital is more than required it will increase the liquidity and profitability.

Options

• Both Assertion (A) and Reason (R) are True and Reason (R) is the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are True and Reason (R) is not the correct explanation of Assertion (A).

• Assertion (A) is True but Reason (R) is False.

• Assertion (A) is False but Reason (R) is True.

Answer 1

Assertion (A) is True but Reason (R) is False.

Explanation:

• Assertion (A): Working capital should be optimum so that profitability and liquidity are balanced – True.
• Reason (R): If working capital is more than required, it increases liquidity (True), but reduces profitability, as excess funds remain idle. So this part is False.