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

The minimum level of current assets that a firm must hold continuously to carry on its business, irrespective of seasonal or cyclical changes in sales, is called:

This is permanent or fixed working capital. It is the minimum level of current assets the business must always hold, whatever the season. Temporary or variable working capital is the additional amount needed only for seasonal or cyclical swings in activity.

  1. APermanent (fixed) working capitalCorrect
  2. BTemporary (variable) working capital
  3. CGross working capital in excess of requirement
  4. DNegative working capital

Explanation

Permanent or fixed working capital is the base level of current assets needed at all times, much like fixed assets. Temporary or variable working capital is the extra amount needed for seasonal or cyclical fluctuations, so option B describes the wrong component.

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