Given below are two statements:
Statement I: Short-term investment decisions are also called capital budgeting decisions.
Statement II: Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Statement I is incorrect but Statement II is correct.
Statement I: Short-term investment decisions are also called capital budgeting decisions. — Incorrect. Short-term investment decisions are called working capital decisions. They deal with the levels of cash, inventory and receivables. Capital budgeting is the name of the long-term investment decision, such as buying a new machine or opening a new branch.
Statement II: Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management. — Correct. Working capital decisions fix how much cash, inventory and receivables a firm holds. Managing each of them well keeps the firm liquid and profitable in its day-to-day work, so they are the ingredients of sound working capital management.
NCERT (2026-27 Edition): “Investment Decision … A long-term investment decision is also called a Capital Budgeting decision. It involves committing the finance on a long-term basis. For example, making investment in a new machine to replace an existing one or acquiring a new fixed asset or opening a new branch, etc. …” “…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. Efficient cash management, inventory management and receivables management are essential ingredients of sound working capital management.” |