Skip to content

CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

A firm finances all its fluctuating current assets with short-term borrowings and its permanent current assets and fixed assets with long-term funds. This working capital financing approach is called:

This is the matching or hedging approach. Each asset is financed by a source of similar maturity: permanent current assets and fixed assets by long-term funds, and fluctuating current assets by short-term borrowings. Conservative and aggressive approaches deviate from this by using more long-term or more short-term funds respectively.

  1. AMatching (hedging) approachCorrect
  2. BConservative approach
  3. CAggressive approach
  4. DZero working capital approach

Explanation

The matching approach aligns the maturity of financing with the nature of the asset: long-term funds for permanent assets and short-term funds for temporary needs. Conservative uses more long-term funds; aggressive uses short-term funds even for part of permanent needs.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Working Capital Management shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Working Capital ManagementFree diagnostic mock

More Introduction to Working Capital Management questions