ExpertEasy2 marksMultiple Choice
ACCA · Question 20 · Working Capital Management
Section B - Case 1: AquaHarvest
Scenario: AquaHarvest operates offshore kelp farms. The company experiences highly seasonal sales, leading to fluctuating working capital requirements. The board is debating how to finance these fluctuating current assets.
Question: If AquaHarvest adopts an 'aggressive' working capital financing policy, how will it finance its fluctuating current assets?
Section B - Case 1: AquaHarvest
Scenario: AquaHarvest operates offshore kelp farms. The company experiences highly seasonal sales, leading to fluctuating working capital requirements. The board is debating how to finance these fluctuating current assets.
Question: If AquaHarvest adopts an 'aggressive' working capital financing policy, how will it finance its fluctuating current assets?
Answer options:
A.
Entirely with long-term finance.
B.
With a mix of long-term and short-term finance, matching the maturity of assets and liabilities.
C.
Entirely with short-term finance.
D.
By issuing new equity shares.
How to approach this question
Recall the three working capital financing policies: Conservative (uses mostly long-term finance), Matching (matches asset life with finance life), and Aggressive (uses mostly short-term finance to save on interest costs, increasing risk).
Full Answer
C.Entirely with short-term finance.✓ Correct
Working capital financing policies dictate how a firm funds its current assets.
- Conservative: Uses long-term finance for permanent current assets and a portion of fluctuating current assets (low risk, low return).
- Matching: Uses long-term finance for permanent assets and short-term finance for fluctuating assets.
- Aggressive: Uses short-term finance for all fluctuating current assets and a portion of permanent current assets (high risk, high return).
Common mistakes
Confusing aggressive financing (using short-term debt) with aggressive investment (holding low levels of inventory/receivables).
Practice the full ACCA FM — Financial Management Practice Exam 6
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