ACCA Financial Management (F9) Certification Practice Exam

Which statement best describes a conservative financing approach?

1. It minimizes working capital

2. It aims to maximize short-term profits

3. It finances all fixed and permanent current assets with long-term capital

4. It relies exclusively on short-term financing

The correct answer is: It finances all fixed and permanent current assets with long-term capital

A conservative financing approach is characterized by the strategy of financing all fixed and permanent current assets with long-term capital. This method reduces the risk associated with potential liquidity issues, as it ensures that the stable, permanent assets of the company are funded by long-term sources that are not subject to frequent renewal or refinancing. By using long-term capital for fixed assets and a portion of working capital needs, the business is typically better positioned to withstand economic fluctuations. This financing strategy leads to a more stable capital structure, thereby supporting sustained operational efficiency and providing a cushion against short-term financial volatility. In summary, such an approach emphasizes stability and assures that permanent investments are adequately supported by funding sources that are also stable over time. This reduces reliance on short-term financing, which can be riskier and subject to abrupt changes in interest rates and availability.