Which of the following is most consistent with the self-liquidating debt principle in working capital management?
A)Fixed assets should be financed with short-term notes payable.
B)Inventory should be financed with preferred stock.
C)Accounts receivable should be financed with short-term lines of credit.
D)Borrow on a floating rate basis to finance investments in permanent assets.

Question

Quizplus · Accepted Answer

The self-liquidating debt principle states that short-term assets should be financed with short-term liabilities. Accounts receivable are considered short-term assets, so they should be financed with short-term lines of credit. This ensures that the line of credit will be paid off once the accounts receivables are collected, effectively self-liquidating the debt. Financing fixed assets with short-term notes payable (A) or inventory with preferred stock (B) does not align with this principle. Borrowing on a floating rate basis to finance investments in permanent assets (D) also does not align with this principle.

Which of the Following Is Most Consistent with the Self-Liquidating