A firm's current ratio is 1.5:1. It wants to maintain a current ratio of 2:1 by paying off some current liabilities. Which of the following will happen?
Explanation:
Paying current liabilities reduces both current assets (cash) and current liabilities equally, leaving working capital (CA - CL) unchanged, though ratio improves.
Assertion (A): Capital is treated as an internal liability of the business. Reason (R): The business and its owner are considered distinct entities under the Business Entity Concept.
A.A is false but R is true
B.Both A and R are true but R is not the correct explanation of A
C.A is true but R is false
D.Both A and R are true and R is the correct explanation of A
Explanation:
The Business Entity Concept treats the owner as a separate entity from the business, making the capital invested by the owner an internal liability.
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