There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.

Assertion (A):  Inventory and Prepaid Expenses are included in Current Assets but not in Liquid Assets.
Reason (R):  Liquid assets are those assets that are either in the form of cash or can be converted into cash in a short time. Inventory cannot be converted into cash in a short time while Prepaid Expenses are not convertible into cash. Thus, they are excluded from Liquid Assets.

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

The correct answer is option 1- Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).

Assertion (A):  Inventory and Prepaid Expenses are included in Current Assets but not in Liquid Assets. THIS IS TRUE.
Reason (R):  Liquid assets are those assets that are either in the form of cash or can be converted into cash in a short time. Inventory cannot be converted into cash in a short time while Prepaid Expenses are not convertible into cash. Thus, they are excluded from Liquid Assets. THIS IS TRUE.

Current assets are resources a company expects to convert into cash or use up within a year. It 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.

Quick assets are defined as those assets which are quickly convertible into cash. They are easily and quickly convertible into cash with minimal or no loss in value. Inventory takes some time to sell, So while calculating quick assets we exclude the inventories at the end and other current assets such as prepaid expenses, advance tax, etc., from the current assets. Because of exclusion of non-liquid current assets it is considered better than current ratio as a measure of liquidity position of the business.

Thus both statements are true and reason is correct explanation of assertion.