There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Weighted average profit method is considered better than the simple average profit method because it assigns more weightage to the profits of the latest year which is more likely to be earned in the future.
Reason (R): The highest weight is attached to the profit of the 1st year and the lowest weight is attached to the latest year.
Answer & explanation
Correct answer: option 3
Sometimes, if there exists an increasing or decreasing trend in profits, it is considered to be better to give a higher weightage to the profits to the recent years than those of the earlier years. Hence, it is advisable to work out weighted average based on specified weights like 1, 2, 3, 4 for respective year’s profit. Maximum weight is given to the latest year.