ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
A rapidly growing manufacturer needs funds to buy machinery with an expected life of ten years. Which source of finance best matches the length of the asset's use?
A ten-year term loan is the best match. Long-term assets should be financed with long-term funds so that repayment lines up with the period of benefit. An overdraft and trade credit are short-term sources and create refinancing risk if used to fund machinery.
- AA bank overdraft repayable on demand
- BA ten-year term loanCorrect
- CExtended credit from trade payables
Explanation
The matching principle says long-term assets should be funded by long-term finance. A ten-year term loan fits the asset's life, whereas an overdraft and trade credit are short-term and could be withdrawn or fall due before the machinery has generated returns.
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