Kappa Ltd. decides to allow its customers a longer period of credit and to keep larger stocks of raw materials. Which item of its financial statements do these financial management decisions affect most directly?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → The amount of its debtors and inventory, and so its total current assets.
Option (1) The amount of its debtors and inventory, and so its total current assets. — Correct. Longer credit to customers means more debtors. Larger stocks of raw materials mean more inventory. Both are current assets, so these decisions change the total current assets and their composition.
Option (2) The size and composition of the block of its fixed assets. — Incorrect. The fixed assets block changes through a capital budgeting decision, such as buying a new plant. Credit and stock decisions are about current assets.
Option (3) The break-up of its long-term finance into debt and equity. — Incorrect. The split of long-term finance into debt and equity is set by the financing decision. Kappa Ltd. has not changed how it raises its funds.
Option (4) The proportion of long-term and short-term funds that it uses. — Incorrect. This proportion is a choice between liquidity and profitability in raising funds. Kappa’s decisions are about the assets it holds, and they do not change where its funds come from.
NCERT (2026-27 Edition): “Importance … (ii) The quantum of current assets and its break-up into cash, inventory and receivables: With an increase in the investment in fixed assets, there is a commensurate increase in the working capital requirement. The quantum of current assets is also influenced by financial management decisions. In addition, decisions about credit and inventory management affect the amount of debtors and inventory which in turn affect the total current assets as well as their composition. |