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Current assets of a business firm should be financed through:
- a)current liability only
- b)long-term liability only
- c)both types (i.e. long and short term liabilities)
- d)None of these
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Current assets of a business firm should be financed through:a)current...
Current assets of a business should be financed through both long term and short-term liabilities. Current assets of a firm are those assets which could be consumed, exhausted or sold within a year.
The short-term financial needs of the companies are generally met from Trade Credit. Consumer Credit, Installment Credit, Account Receivable Financing, Bank Credit and Other Sources. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc.
Sources of long-term finance are shares, debentures, bonds.
etc. These are required to maintain Working capital margin of the company. Working Capital Margin means the additional amount that a business must maintain over and above its regular working capital required to meet the unforeseen expenses.
So in certain circumstances the long-term investments can be used to finance the current assests.
The short-term financial needs of the companies are generally met from Trade Credit. Consumer Credit, Installment Credit, Account Receivable Financing, Bank Credit and Other Sources. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc.
Sources of long-term finance are shares, debentures, bonds.
etc. These are required to maintain Working capital margin of the company. Working Capital Margin means the additional amount that a business must maintain over and above its regular working capital required to meet the unforeseen expenses.
So in certain circumstances the long-term investments can be used to finance the current assests.
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Current assets of a business firm should be financed through:a)current...
Current Assets and Financing
Current assets refer to the assets of a business that can be converted into cash within one year. These assets include cash, accounts receivable, inventory, and prepaid expenses. On the other hand, current liabilities refer to the debts or obligations of a business that are due within one year. These liabilities include accounts payable, accrued expenses, and short-term loans.
Financing, on the other hand, refers to the process of obtaining funds to run a business. There are two main types of financing: long-term and short-term financing. Long-term financing refers to funds that are borrowed for a period of more than one year, while short-term financing refers to funds that are borrowed for a period of less than one year.
Financing Current Assets
Current assets are financed through a combination of long-term and short-term liabilities. This is because current assets are used to generate revenue in the short term, but they are also needed to support long-term growth. Therefore, a business needs a mix of short-term and long-term financing to ensure that it can meet its short-term obligations while also investing in its long-term growth.
The Benefits of Using Both Types of Financing
Using both short-term and long-term financing to finance current assets has several benefits, including:
1. Lower Interest Rates: Long-term financing typically has lower interest rates than short-term financing. This means that a business can save money on interest charges by using long-term financing to finance its current assets.
2. Greater Flexibility: Using both short-term and long-term financing gives a business greater flexibility in managing its cash flow. Short-term financing can be used to cover temporary cash shortages, while long-term financing can be used to fund long-term investments.
3. Better Creditworthiness: A business that uses both short-term and long-term financing is viewed as more creditworthy by lenders. This is because it demonstrates that the business has a solid financial plan in place and is able to manage its cash flow effectively.
Conclusion
In conclusion, current assets of a business should be financed through a combination of long-term and short-term liabilities. This approach provides a business with the flexibility and financial stability it needs to manage its cash flow effectively, while also investing in its long-term growth.
Current assets refer to the assets of a business that can be converted into cash within one year. These assets include cash, accounts receivable, inventory, and prepaid expenses. On the other hand, current liabilities refer to the debts or obligations of a business that are due within one year. These liabilities include accounts payable, accrued expenses, and short-term loans.
Financing, on the other hand, refers to the process of obtaining funds to run a business. There are two main types of financing: long-term and short-term financing. Long-term financing refers to funds that are borrowed for a period of more than one year, while short-term financing refers to funds that are borrowed for a period of less than one year.
Financing Current Assets
Current assets are financed through a combination of long-term and short-term liabilities. This is because current assets are used to generate revenue in the short term, but they are also needed to support long-term growth. Therefore, a business needs a mix of short-term and long-term financing to ensure that it can meet its short-term obligations while also investing in its long-term growth.
The Benefits of Using Both Types of Financing
Using both short-term and long-term financing to finance current assets has several benefits, including:
1. Lower Interest Rates: Long-term financing typically has lower interest rates than short-term financing. This means that a business can save money on interest charges by using long-term financing to finance its current assets.
2. Greater Flexibility: Using both short-term and long-term financing gives a business greater flexibility in managing its cash flow. Short-term financing can be used to cover temporary cash shortages, while long-term financing can be used to fund long-term investments.
3. Better Creditworthiness: A business that uses both short-term and long-term financing is viewed as more creditworthy by lenders. This is because it demonstrates that the business has a solid financial plan in place and is able to manage its cash flow effectively.
Conclusion
In conclusion, current assets of a business should be financed through a combination of long-term and short-term liabilities. This approach provides a business with the flexibility and financial stability it needs to manage its cash flow effectively, while also investing in its long-term growth.
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