When a portion of the firm's fixed assets are financed with current liabilities, the firm
A) has positive net working capital.
B) has negative net working capital.
C) is in a low-risk position.
D) has excessive amounts of current assets.

Question

Quizplus · Accepted Answer

Financing fixed assets with current liabilities can create a negative working capital position. This is because current liabilities are due within a year, while fixed assets often have a longer life span. This creates a potential risk for the firm if they are unable to renew or roll over these liabilities when they mature. In this situation, the firm may have to sell its fixed assets to pay off current liabilities, which can lead to losses. Therefore, this scenario can create a riskier financial position for the firm.

When a Portion of the Firm's Fixed Assets Are Financed