Which of the following is a disadvantage of the use of current liabilities to finance assets?
A) greater risk of illiquidity
B) less flexibility
C) higher interest costs
D) the hedging principle

Question

Quizplus · Accepted Answer

Financing assets with current liabilities can lead to a greater risk of illiquidity because these liabilities must be paid off within a year or less, which may cause cash flow problems if the assets do not generate enough cash to cover the liabilities. Additionally, using current liabilities to finance assets may limit a company's flexibility because it may be difficult to adjust the amount of liabilities given their short-term nature. Finally, the hedging principle is not relevant to this topic. While it is true that higher interest costs may be a disadvantage of using current liabilities to finance assets, this is not an option in the choices.

Which of the Following Is a Disadvantage of the Use