There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): The Current Ratio is calculated by dividing Current Assets by Total Liabilities and Current Assets include Loose Tools, Stores & Spares, and Provision for Doubtful Debts.
Reason (R): The formula for the Current Ratio is Current Assets/Current Liabilities. Loose Tools, Stores & Spares, and Provision for Doubtful Debts are included in Current Assets.
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Both are incorrect.
Assertion (A): The Current Ratio is calculated by dividing Current Assets by Total Liabilities and Current Assets include Loose Tools, Stores & Spares, and Provision for Doubtful Debts. THIS IS FALSE as current ratio is calculated by dividing current assets with current liabilities.
Reason (R): The formula for the Current Ratio is Current Assets/Current Liabilities. Loose Tools, Stores & Spares, and Provision for Doubtful Debts are included in Current Assets. THIS IS FALSE as Provision for Doubtful Debts are included in current liabilities not in current assets.
* Current ratio is the proportion of current assets to current liabilities. It is expressed as follows:
Current Ratio = Current Assets : Current Liabilities.
Current assets include current investments, inventories, trade receivables (debtors and bills receivables), cash and cash equivalents, short-term loans and advances and other current assets such as prepaid expenses, advance tax and accrued income, etc. Current liabilities include short-term borrowings, trade payables (creditors and bills payables), other current liabilities and short-term provisions.