Some factors carry the same name in the list of factors affecting fixed capital and in the list affecting working capital. Which of the following pairs of a factor (with the list it belongs to) and its description is correctly matched?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Nature of business (working capital) – Service industries which usually do not have to maintain inventory need less.
Option (1) Growth prospects (working capital) – A company may create higher capacity to meet the anticipated higher demand quicker. — Incorrect. Creating higher capacity means more plant and buildings, so it is growth prospects under fixed capital. Under working capital, growth prospects mean more funds to meet higher production and sales targets.
Option (2) Scale of operations (fixed capital) – The quantum of inventory and debtors required is generally high. — Incorrect. A high quantum of inventory and debtors is scale of operations under working capital. Under fixed capital, a larger scale means a bigger plant and more space.
Option (3) Nature of business (working capital) – Service industries which usually do not have to maintain inventory need less. — Correct. Under working capital, the nature of business decides how much stock a firm holds. Service firms usually hold no inventory, so less money is locked up and they need less working capital.
Option (4) Scale of operations (working capital) – A larger organisation needs a bigger plant and more space. — Incorrect. A bigger plant and more space is scale of operations under fixed capital. Under working capital, a larger scale means more inventory and debtors.
NCERT (2026-27 Edition): “2. Scale of Operations: A larger organisation operating at a higher scale needs bigger plant, more space etc. and therefore, requires higher investment in fixed assets when compared with the small organisation.” “5. Growth Prospects: Higher growth of an organisation generally requires higher investment in fixed assets. Even when such growth is expected, a company may choose to create higher capacity in order to meet the anticipated higher demand quicker. This entails larger investment in fixed assets and consequently larger fixed capital.” “1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, a trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.” “2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.” |