Consider the following statements about fixed and working capital:
(A) Fixed assets are those which remain in the business for more than one year, usually for much longer.
(B) Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year.
(C) Investment in current assets facilitates the long-term growth of the business.
(D) Decisions to invest in fixed assets are called working capital decisions.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (B) only
(A) Fixed assets are those which remain in the business for more than one year, usually for much longer. — Correct. Plant, machinery, land and buildings are used for many years, so they are fixed assets.
(B) Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year. — Correct. Inventories, debtors and bills receivable turn into cash within a year in the normal course of business.
(C) Investment in current assets facilitates the long-term growth of the business. — Incorrect. Investment in current assets facilitates smooth day-to-day operations. Long-term growth comes from investment in fixed assets.
(D) Decisions to invest in fixed assets are called working capital decisions. — Incorrect. Decisions to invest in fixed assets are capital budgeting decisions. Working capital decisions deal with current assets such as cash, inventory and receivables.
NCERT (2026-27 Edition): “Meaning Every company needs funds to finance its assets and activities. Investment is required to be made in fixed assets and current assets. Fixed assets are those which remains in the business for more than one year, usually for much longer, e.g., plant and machinery, furniture and fixture, land and building, vehicles, etc. Decision to invest in fixed assets must be taken very carefully as the investment is usually quite large. Such decisions once taken are irrevocable except at a huge loss. Such decisions are called capital budgeting decisions. Current assets are those assets which, in the normal routine of the business, get converted into cash or cash equivalents within one year, e.g., inventories, debtors, bills receivables, etc.” “Working Capital Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. …” |