With regard to the hedging principle,which of the following assets should be financed with current liabilities?
A) minimum level of cash required for year round operations
B) expansion of accounts receivable to meet seasonal demand
C) machinery
D) buildings

Question

Quizplus · Accepted Answer

The hedging principle suggests that current assets should be financed with current liabilities to minimize the risk of default. Accounts receivable are considered current assets, and financing the expansion of accounts receivable with current liabilities can help match the timing of cash inflows and outflows. Financing long-term assets such as machinery and buildings with short-term (current) liabilities can increase the risk of default, as these liabilities may need to be refinanced before the assets generate enough cash to repay them. The minimum level of cash required for year-round operations is typically financed with short-term debt, but this is not explicitly stated as an option in the question.

With Regard to the Hedging Principle,which of the Following Assets