There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Current assets when divided by Current Liabilities, the ratio which comes out is termed as Liquid Ratio.
Reason (R): The formula for the Liquid Ratio is Liquid Assets/Current Liabilities.
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Assertion (A) is not correct but the Reason (R) is correct.
Assertion (A): Current assets when divided by Current Liabilities, the ratio which comes out is termed as Liquid Ratio- THIS IS FALSE because when Current assets are divided by Current Liabilities, the ratio which comes out is termed as current Ratio.
Current Ratio = Current Assets / Current Liabilities. This ratio measures the company's ability to pay off its current liabilities with its current assets. A Current Ratio greater than 1 indicates that the company has sufficient current assets to cover its current liabilities, which is considered a healthy liquidity position. The ideal ratio is 2:1.
Reason (R): The formula for the Liquid Ratio is Liquid Assets/Current Liabilities. THIS IS TRUE.
Quick Ratio = Liquid assets / Current Liabilities. The Quick Ratio provides a more conservative measure of liquidity, as it excludes inventory, which may not be easily converted into cash in the short term. A Quick Ratio greater than 1 suggests that the company can meet its short-term obligations without relying on selling inventory. The ideal ratio is 1:1.