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Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?
Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.
Reason (R): The working capital requirement of a business become higher with higher rate of inflation.
- a)Both A and R are true and R is the correct explanation of A
- 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)A is false, but R is true
Correct answer is option 'A'. Can you explain this answer?
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Direction: In the questions given below are two statements labelled a...
Inflation leads to increase in prices of raw materials, thus more working capital is required. Changes in the price level also affect the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets.
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Direction: In the questions given below are two statements labelled a...
Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.
Reason (R): The working capital requirement of a business becomes higher with a higher rate of inflation.
The correct answer is option 'A', which states that both the assertion and the reason are true, and the reason is the correct explanation of the assertion.
Explanation:
Working Capital:
Working capital refers to the funds that a business requires to carry out its day-to-day operations. It is the difference between a company's current assets (such as cash, inventory, accounts receivable) and its current liabilities (such as accounts payable, short-term debt).
Impact of Rising Prices:
When prices rise, it increases the cost of inputs such as raw materials, labor, and overhead expenses for a business. This means that a larger amount of funds is required to purchase the same quantity of inputs as before. As a result, the overall cost of production and sales increases.
Impact on Working Capital:
1. Inventory: With rising prices, businesses need to maintain higher levels of inventory to meet the same level of demand. This requires additional funds to be tied up in inventory, increasing the working capital requirement.
2. Accounts Receivable: If the prices of goods/services increase, it may take longer for customers to make their payments. This leads to a higher accounts receivable balance and a longer cash conversion cycle, increasing the working capital requirement.
3. Accounts Payable: Suppliers may increase their prices due to inflation, requiring the business to make larger payments for their purchases. This increases the accounts payable balance and the working capital requirement.
4. Cash Management: In an inflationary environment, businesses need to manage their cash flow effectively to cover the increased operating expenses. This may involve maintaining higher cash reserves or arranging for additional credit facilities, which again increases the working capital requirement.
Conclusion:
As prices rise, businesses require larger amounts of working capital to maintain a constant volume of production and sales. This is because the cost of inputs increases, inventory levels need to be higher, accounts receivable may take longer to collect, and cash management becomes more critical. Therefore, the reason provided is a correct explanation of the assertion.
Reason (R): The working capital requirement of a business becomes higher with a higher rate of inflation.
The correct answer is option 'A', which states that both the assertion and the reason are true, and the reason is the correct explanation of the assertion.
Explanation:
Working Capital:
Working capital refers to the funds that a business requires to carry out its day-to-day operations. It is the difference between a company's current assets (such as cash, inventory, accounts receivable) and its current liabilities (such as accounts payable, short-term debt).
Impact of Rising Prices:
When prices rise, it increases the cost of inputs such as raw materials, labor, and overhead expenses for a business. This means that a larger amount of funds is required to purchase the same quantity of inputs as before. As a result, the overall cost of production and sales increases.
Impact on Working Capital:
1. Inventory: With rising prices, businesses need to maintain higher levels of inventory to meet the same level of demand. This requires additional funds to be tied up in inventory, increasing the working capital requirement.
2. Accounts Receivable: If the prices of goods/services increase, it may take longer for customers to make their payments. This leads to a higher accounts receivable balance and a longer cash conversion cycle, increasing the working capital requirement.
3. Accounts Payable: Suppliers may increase their prices due to inflation, requiring the business to make larger payments for their purchases. This increases the accounts payable balance and the working capital requirement.
4. Cash Management: In an inflationary environment, businesses need to manage their cash flow effectively to cover the increased operating expenses. This may involve maintaining higher cash reserves or arranging for additional credit facilities, which again increases the working capital requirement.
Conclusion:
As prices rise, businesses require larger amounts of working capital to maintain a constant volume of production and sales. This is because the cost of inputs increases, inventory levels need to be higher, accounts receivable may take longer to collect, and cash management becomes more critical. Therefore, the reason provided is a correct explanation of the assertion.
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Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer?
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Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer?.
Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer?.
Solutions for Direction: In the questions given below are two statements labelled as Assertion (A) and Reason (R). In the context of the two statements, which one of the following is correct?Assertion (A): With rising prices, larger amounts are required even to maintain a constant volume of production and sales.Reason (R): The working capital requirement of a business become higher with higher rate of inflation.a)Both A and R are true and R is the correct explanation of Ab)Both A and R are true, but R is not the correct explanation of Ac)A is true, but R is falsed)A is false, but R is trueCorrect answer is option 'A'. Can you explain this answer? in English & in Hindi are available as part of our courses for Commerce.
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