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

In working capital management, the term 'permanent (fixed) working capital' refers to:

Permanent working capital is the minimum level of current assets that a firm must keep at all times to run its operations, regardless of seasonal changes. Extra current assets needed only in peak periods are temporary or variable working capital, not permanent working capital.

  1. AThe minimum level of current assets a firm must hold at all times to carry on its operationsCorrect
  2. BThe extra current assets held only during the peak selling season
  3. CThe excess of current liabilities over current assets at the year end
  4. DThe amount of long-term funds raised through debentures to buy plant

Explanation

Permanent working capital is the minimum investment in current assets that is needed continuously, whatever the season or sales level. The seasonal or fluctuating extra requirement is temporary working capital, which is why the second option is wrong. The other two options describe unrelated ideas.

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