Consider the following statements about the management of fixed capital:
(A) Fixed capital refers to investment in long-term assets.
(B) Management of fixed capital involves allocation of the firm’s capital to projects or assets with long-term implications.
(C) Decisions on fixed capital affect the growth, profitability and liquidity of the business in the long run.
(D) Fixed capital should be financed through long-term sources such as debentures and retained earnings.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
(A) Fixed capital refers to investment in long-term assets. — Correct. Fixed capital is money put into long-term assets, which last for more than one year.
(B) Management of fixed capital involves allocation of the firm’s capital to projects or assets with long-term implications. — Correct. Managing fixed capital means allocating the firm’s capital to projects or assets with long-term effects. These are the capital budgeting decisions.
(C) Decisions on fixed capital affect the growth, profitability and liquidity of the business in the long run. — Incorrect. Fixed capital decisions affect the growth, profitability and risk of the business in the long run. Liquidity is affected by short-term (working capital) decisions on cash, inventory and receivables.
(D) Fixed capital should be financed through long-term sources such as debentures and retained earnings. — Correct. Fixed assets must be financed through long-term sources, such as shares, debentures, long-term loans and retained earnings.
NCERT (2026-27 Edition): “Management of Fixed Capital Fixed capital refers to investment in long-term assets. Management of fixed capital involves allocation of firm’s capital to different projects or assets with long-term implications for the business. These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability and risk of the business in the long run. These long-term assets last for more than one year. It must be financed through long-term sources of capital such as equity or preference shares, debentures, long-term loans and retained earnings of the business. Fixed Assets should never be financed through short-term sources. …” “Investment Decision … Short-term investment decisions (also called working capital decisions) are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day-to-day working of a business. These affect the liquidity as well as profitability of a business. …” |