ACCA Financial Management (F9) Certification Practice Exam

What type of funds do local authorities typically borrow?

1. Long-term fixed assets

2. Short-term funds through debt instruments

3. Equity financing

4. Foreign investments

The correct answer is: Short-term funds through debt instruments

Local authorities typically borrow short-term funds through debt instruments to manage their cash flow needs and finance various expenditures. This approach allows them to cover immediate operational costs, such as salaries, utility payments, and other day-to-day expenses, which may fluctuate throughout the year. Short-term borrowing is advantageous for local authorities as it provides flexibility to address temporary funding gaps without committing to long-term financial obligations. By utilizing instruments like treasury bills, short-term notes, or other forms of commercial paper, they can ensure that they have adequate liquidity to meet their obligations. Long-term fixed assets represent a different category of financing, focusing on assets that have a useful life extending over several years, which is not the immediate need for local authorities facing short-term cash flow issues. Equity financing typically relates to the sale of ownership stakes, which is not a common approach for local authorities as they primarily operate through budgets funded by taxation and other revenue rather than generating profit like private enterprises. Foreign investments also do not apply here, as local authorities do not engage directly in investment markets for the purpose of capital growth; rather, their efforts are focused on managing public funds efficiently for local services.