ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies
Which of the following is the most appropriate way for a company to finance a permanent increase in its core level of working capital under a matching funding policy?
Long-term finance such as equity or long-term loans is appropriate, because a matching policy funds permanent current assets with long-term sources and only temporary fluctuations with short-term finance such as overdrafts.
- AShort-term bank overdraft
- BLong-term finance such as equity or long-term loansCorrect
- CExtended credit from trade payables only
- DFactoring of fluctuating receivables
Explanation
Under a matching policy, permanent current assets are financed by long-term funds and fluctuating current assets by short-term funds. A permanent increase in core working capital is therefore financed long-term. An overdraft would be mismatched, as it is short-term and repayable on demand.
Did you get it right without looking?
One question tells you little. A timed set on Determining working capital needs and funding strategies shows your real accuracy, how long you take and where you lose marks.
More Determining working capital needs and funding strategies questions
- Which funding strategy is most likely to expose a growing business to the risk of overtrading?
- Zeta Co has annual credit sales of $9,125,000 and annual cost of sales of $6,570,000. Average inventory is $720,000 (all finished goods), av…
- Dunmore Co has annual sales of $3,650,000, all on credit, and cost of sales of $2,920,000. It currently takes 60 days to collect from custom…
- Which of the following ratio movements, taken together, most strongly indicates overcapitalisation (excess working capital) rather than over…
- Which of the following is the most typical symptom of overtrading in a business?
- Which change would shorten an entity's working capital cycle (cash operating cycle)?