CA Inter P6 · Chapter 9 · Question 8 of 9
A firm finances all of its permanent current assets and part of its temporary (fluctuating) current assets with long-term funds, using short-term funds only for peak needs. This working capital financing policy is best described as:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Conservative approach
Explanation
Under the conservative approach, long-term funds cover permanent working capital and part of the temporary requirement, which lowers liquidity risk but raises cost. The matching approach finances permanent needs with long-term funds and temporary needs with short-term funds. The aggressive approach uses short-term funds even for part of the permanent requirement.
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