There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Goods sold on a credit period of 36 months will be shown as Other Current Assets if the Operating Cycle Period is more than 36 months.
Reason (R): An asset that is receivable within 12 months or within the period of the Operating Cycle is shown as a Current Asset while all other assets are Non-current Assets.
Answer & explanation
Correct answer: option 1
The operating cycle, also known as the cash cycle of a company, is an activity ratio measuring the average period required for turning the company’s inventories into cash. This process of producing or purchasing inventories, selling finished goods, receiving cash from customers, and using that cash to purchase/produce inventories again is a never-ending cycle, as long as the company remains in operation.
If the operating period is given then all things which remain in the operating period are classified as current. If the operating period is not given it is assumed of 12 months.