A negative feature of defining investment by EXCLUDING the portion of total assets employed that are financed by short-term creditors is that:
A)current liabilities are sometimes difficult to define
B)short-term debt is always more expensive to finance than long-term debt
C)this method encourages managers to use an excessive amount of short-term debt
D)this method encourages managers to use an excessive amount of long-term debt

Question

Quizplus · Accepted Answer

This method may encourage managers to use an excessive amount of short-term debt as it excludes it from the calculation of investment. This can lead to liquidity issues and the need to frequently refinance short-term debt, creating additional costs and risks for the company. Therefore, excluding short-term debt from the calculation of investment may not accurately reflect the actual level of investment made by the company.

A Negative Feature of Defining Investment by EXCLUDING the Portion