ACCA Financial Management (F9) Certification Practice Exam

Which approach finances all fixed assets with long-term capital while holding high levels of working capital?

1. Aggressive approach

2. Conservative approach

3. Moderate approach

4. Hybrid approach

The correct answer is: Conservative approach

The conservative approach is characterized by financing all fixed assets entirely with long-term capital while also maintaining high levels of working capital. This strategy prioritizes stability and minimizes risk by ensuring that long-term investments are fully funded through long-term financing sources, such as equity or long-term debt. By utilizing a conservative approach, a business can better navigate uncertainties and fluctuations in cash flows, making it less vulnerable to short-term financial pressures. The high levels of working capital provide a buffer, enabling the company to comfortably manage its day-to-day operational needs without the risk of liquidity issues. This approach is particularly suitable for organizations that want to maintain a strong balance sheet and avoid taking on excessive short-term debt. In contrast, other approaches such as aggressive or moderate involve a mix of long-term and short-term financing, which can lead to higher leverage and greater risk exposure. The hybrid approach combines elements of various strategies, which might not focus exclusively on either long-term capital for fixed assets or significant working capital levels. Therefore, the conservative approach aligns with the defined strategy of fully financing fixed assets with long-term capital while also upholding substantial working capital.