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

Anand Plastics finances all its permanent current assets and a part of its temporary current assets with long-term funds, keeping very little short-term borrowing. This working capital financing policy is best described as:

This is a conservative financing policy. Long-term funds cover permanent and part of temporary current assets, which reduces the risk of liquidity problems but increases financing cost, so profitability is lower. Aggressive and matching policies use more short-term funds than this.

  1. AConservative policy, with lower risk and lower profitabilityCorrect
  2. BAggressive policy, with higher risk and higher profitability
  3. CMatching policy, with risk and profitability at a medium level
  4. DAggressive policy, with lower risk and lower profitability

Explanation

Using long-term funds for permanent and part of temporary current assets is the conservative approach. Long-term funds cost more but lower the risk of refinancing, so profitability is lower. An aggressive policy does the opposite, using short-term funds even for part of permanent needs, and a matching policy funds temporary assets only with short-term funds.

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