When a portion of a firm's fixed assets are financed with current liabilities, ________.
A) the firm will have positive net working capital
B) the net working capital will decrease
C) the current ratio will increase
D) the firm will have negative net working capital

Question

Quizplus · Accepted Answer

Financing fixed assets with current liabilities means that the firm is using short-term funds to purchase long-term assets, which is not sustainable in the long run. As a result, the net working capital will decrease. A decrease in net working capital means that the current assets are decreasing relative to the current liabilities, which is not a good sign for a business. Option A is incorrect because a decrease in net working capital will lead to negative net working capital, not positive. Option C is incorrect because the current ratio will decrease as current liabilities increase without corresponding increases in current assets. Option D is incorrect because the statement says a portion of fixed assets are financed with current liabilities which does not necessarily imply that the firm has no other current assets.

When a Portion of a Firm's Fixed Assets Are Financed