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

In working capital management, the 'hedging' (matching) approach to financing current assets requires that:

Under the hedging or matching approach, permanent current assets are financed from long-term sources and fluctuating current assets from short-term sources, so that the maturity of each asset matches the maturity of its financing. Using only long-term or only short-term funds would be conservative or aggressive.

  1. APermanent current assets be financed by long-term sources and fluctuating current assets by short-term sourcesCorrect
  2. BAll current assets be financed entirely by long-term sources
  3. CAll current assets be financed entirely by short-term sources
  4. DFixed assets be financed by short-term sources and current assets by long-term sources

Explanation

The matching approach aligns the maturity of the financing with the nature of the asset. Permanent (core) current assets are financed with long-term funds, while seasonal or fluctuating current assets are financed with short-term funds. Financing everything long-term describes a conservative policy, and everything short-term an aggressive one.

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