CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
Which of the following is most likely to INCREASE the working capital requirement of a manufacturing firm, other things remaining equal?
A liberal credit policy to customers increases working capital requirement because more money is tied up in debtors for longer, extending the operating cycle. The other options shorten the cycle or increase financing from suppliers, thereby reducing the funds needed.
- AA shortening of the production process time
- BAn increase in the credit period allowed by suppliers
- CA liberal credit policy allowing customers longer to payCorrect
- DAdoption of a just-in-time inventory system
Explanation
Longer customer credit increases debtors and lengthens the operating cycle, so more funds are locked in. Shorter production time and just-in-time reduce inventory holding, and longer supplier credit reduces the funds required.
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