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

Under the matching (hedging) approach to financing current assets, which of the following is correct?

Under the matching approach, permanent current assets are financed from long-term sources and temporary or seasonal current assets from short-term sources. This matches the maturity of funds with the duration of the asset need. Financing everything long-term is conservative, while financing permanent needs short-term is aggressive.

  1. APermanent current assets are financed by long-term sources and temporary current assets by short-term sourcesCorrect
  2. BPermanent current assets are financed by short-term bank borrowing to reduce the cost of funds
  3. CAll current assets, permanent and temporary, are financed by long-term funds
  4. DTemporary current assets are financed by equity share capital so that liquidity is protected

Explanation

The matching approach ties the maturity of the financing to the life of the asset. The core, permanent level of current assets needs long-term funds, while seasonal or temporary needs are met by short-term funds. Financing everything long-term is the conservative approach, and financing permanent needs short-term is the aggressive approach, so those options are wrong.

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