{"id":18658,"date":"2021-02-15T10:26:35","date_gmt":"2021-02-15T04:56:35","guid":{"rendered":"https:\/\/mcq-questions.com\/?p=18658"},"modified":"2022-03-02T11:11:38","modified_gmt":"2022-03-02T05:41:38","slug":"ncert-solutions-for-class-12-business-studies-chapter-9","status":"publish","type":"post","link":"https:\/\/mcq-questions.com\/ncert-solutions-for-class-12-business-studies-chapter-9\/","title":{"rendered":"NCERT Solutions for Class 12 Business Studies Chapter 9 Financial Management"},"content":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies<\/a> Chapter 9 Financial Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.<\/p>\n

Financial Management NCERT Solutions for Class 12 Business Studies Chapter 9<\/h2>\n

Financial Management Questions and Answers <\/span>Class 12 Business Studies Chapter 9<\/h3>\n

Question 1.
\nThe cheapest sources of finance is ………….
\n(a) debentures
\n(b) equity share capital
\n(c) preference share
\n(d) reterised earning
\nAnswer:
\n(a) Debentures.<\/p>\n

\"NCERT<\/p>\n

Question 2.
\nA decision to acquire a new and modern plant to upgrade an old one is a ……..
\n(a) financing decision
\n(b) working capital decision
\n(c) investment decision
\n(d) dividend decision
\nAnswer:
\n(c) Investment Decision.<\/p>\n

Question 3.
\nOther things remaining the same, as increase in the tax rate on corporate profits will
\n(a) make debt relatively cheaper
\n(b) make debt relatively less cheap home
\n(c) No impact on the cost of debt
\n(d) We can’t say
\nAnswer:
\n(a) Make debt relatively cheaper.<\/p>\n

Question 4.
\nCompanies with higher growth paternal are likely to ………..
\n(a) pay lower dividends
\n(b) pay higher dividends
\n(c) dividends are not affected by growth considerations
\n(d) none of the above
\nAnswer:
\n(b) Pay higher dividends.<\/p>\n

Question 5.
\nFinancial leverage is called favorable if ………..
\n(a) Return of Investment is lower than cost of debt
\n(b) ROI is higher than cost of debt
\n(c) Debt is nearly available
\n(d) If the degree of existing financial leverage is low
\nAnswer:
\n(b) ROI is higher than cost of debt.<\/p>\n

\"NCERT<\/p>\n

Question 6.
\nHigher debt equity ratio Equity results in
\n(a) lower financial risk
\n(b) higher degree of operating risk
\n(c) higher degree of financial risk
\n(d) higher EPS
\nAnswer:
\n(a) Lower financial risk.<\/p>\n

Question 7.
\nHigher working capital usually results in
\n(a) higher current ratio, higher risk and higher profits
\n(b) lower current ratio, higher risk and profits
\n(c) higher equitably, lower risk and lower profits
\n(d) lower equitably, lower risk and higher profits
\nAnswer:
\n(a) Higher current ratio, higher risk and higher profits.<\/p>\n

Question 8.
\nCurrent assets are those assets which get converted into cash
\n(a) within six month
\n(b) within one year
\n(c) between one and three year
\n(d) between three and five year
\nAnswer:
\n(b) Within one year.<\/p>\n

\"NCERT<\/p>\n

Question 9.
\nFinancial planning arrives at
\n(a) minimising the external borrowing by resorting the equity issues
\n(b) entering that the firm always have sinthicicanlty more fund than required so that there is no pugnacity of funds
\n(c) ensuring that the firm paces neither a shortage nor a glut of unusable funds
\n(d) doing only what is possible with the funds that the firms has at its disposal
\nAnswer:
\n(c) Ensuring that the firm paces neither a shortage nor a glut of unusable funds.<\/p>\n

Question 10.
\nHigher dividends per share is associated with
\n(a) high earnings, high cash flows, unusable earnings and higher growth opportunities
\n(b) high earnings, high cash flows, stable earnings and lower high growth opportunities.
\n(c) high earnings, high cash flows, stable earnings and lower growth opportunities.
\n(d) high earnings, low cash flows, stable earnings and lower growth opportunities.
\nAnswer:
\n(b) high earnings, high cash flows, stable earnings and lower high growth opportunities.<\/p>\n

Question 11.
\nA fixed asset should be financed through
\n(a) a long term liability
\n(b) a short term liability
\n(c) a mix of long and short term liabilities
\nAnswer:
\n(a) A long term liability.<\/p>\n

Question 12.
\nCurrent assets of a business firm should’be finance through
\n(a) Current liability only
\n(b) long term liability only .
\n(c) party from both types i.e. long and short term liabilities
\nAnswer:
\n(c) Party from both types i.e. long and short term liabilities.<\/p>\n

Short Answer Type Questions<\/span><\/p>\n

Question 1.
\nWhat is meant by capital structure ?
\nAnswer:
\nMeaning of capital structure : The term’capital structure’refers to the proportion between the various long term sources of finance in the total capital of the firm.<\/p>\n

The major sources of long term finance include ‘Proprietor’s Funds’ and ‘Borrowed Funds’. Proprietors Funds include equity capital, preference capital, and reserves and surpluses (i.e., retained earnings) and Borrowed funds include long term debts such as loans from financial institutions, debentures etc. In the capital structure decisions, it is determined as to what should be the proportion of each of the above sources of finance in the total capital of the firm.<\/p>\n

In other words, how much finance is to be raised from each of these sources. These sources differ from each other in term of risk and their Cost to the enterprise. Some sources are less costly but more risky wheres others are more costly but less risky. To illustrate, debentures are least costly source of finance (because rate of interest is usually lower than the rate of dividend and interest paid on debentures is deducted from profits while calculating the tax) but these are most risky<\/p>\n

\"NCERT<\/p>\n

(because it involves a burden to pay the interest irrespective of the profits earned by the company and the debenture \u2019 holders can move to the court to recover the interest and the principal amount. On the other hand, equity share capital is the most costlier ” source of finance (as return expected by equity share holders is greater than the interest on debentures and the dividend on preference share) but these are least risky (as there is no fixed commitment to i, pay dividend and the return of equity capital).<\/p>\n

Preference share capital lies between debentures and equity capital in terms of risk and cost.
\nWhile choosing the source of finance a financial manager makes f an attempt to ensure that risk as well as cost of capital is minimum. For this purpose he has to answer the following questions.<\/p>\n

    \n
  • How much amount should be raised through issue of equity?<\/li>\n
  • How much amount should be raised through issue of perference share capital?<\/li>\n
  • How much amount should be raised through debentures and, other long term debts?<\/li>\n<\/ul>\n

    While deciding the proportion of finance raised from’various sources, the financial manager weighs the pros and cons of various sources of finance and select the most advantageous source. The selection also depends on various internal and external factors and hence the pattern of capital structure can be different among different businesses and also among the different companies in the same business.<\/p>\n

    Question 2.
    \nDiscuss the two objectives of financial planning.
    \nAnswer:
    \nFinancial planning is an important function of plan financial management. This function has to be performed whether the business is big or small. Similarly, a new as well as an existing business must perform this’function very carefully because it is concerned with the procurement and effective utilisation of funds. A carefully prepared financial plan will not only ensure the economical and sufficient procurement of funds but their proper utilisation also.<\/p>\n

    Meaning of Financial Planning.<\/strong><\/p>\n

    Different authors have different views about the meaning of financial planning. These views can be classified into two groups.
    \n(i) Narrow concept of financial planning and
    \n(ii) Broader concept of financial planning
    \n(i) Narrow concept of Financial Planning
    \nIn the narrow concept, there are two views : According to first view, some authors are of the opinion that financial planning means estimating or forecasting the financial requirements of the business. According to second view, some other authors are of the opinion that financial planning means determining the capital structure of the business.<\/p>\n

    According to the supporters of second view, financial planning is related to capital structure, i.e. determining the proportion in which the funds are to be raised by various sources such as equity shares, preference shares, debentures etc.<\/p>\n

    Both of these views are considered faulty because the first view emphasises only the estimation of financial requirements but ignores the determination of capital structure whereas the second view ignores the estimation of financial requirements.<\/p>\n

    (ii) Broader concept of Financial Planning : In the broader concept, financial planning means estimation of financial requirements and the determination of capital structure. According to this concept, the following activities may be induded in the term financial planning.<\/p>\n

      \n
    • Estimating the financial requirements of the business.<\/li>\n
    • Determination of capital structure, i.e. the determination of the proportion in which finance will be raised from various sources of finance.<\/li>\n
    • To establish the policies to be pursued for the flotation of various securities.<\/li>\n
    • To-establish and maintain a system of financial control governing the allocation and utilisation of funds.<\/li>\n<\/ul>\n

      Walker and Baughn also view the financial planning in a broader concept, According to them :
      \n“Financial planning pertains to the function of finance and includes the determination of the firms’ financial objectives, financial policies and financial procedures.” – Walker and Baughn<\/p>\n

      \"NCERT<\/p>\n

      Objective of Financial Planning
      \nFollowing are the main objectives of financial planning :<\/p>\n

        \n
      • To provide adequate funds to the business. Neither the funds should be short nor, in excess of the needs of business.<\/li>\n
      • To raise the funds in a manner that the cost of capital is minimum.<\/li>\n
      • To ensure flexibility in capital structure so that changes in the sources of funds may be made according to the changing conditions.<\/li>\n
      • To ensure simplicity in the capital structure.<\/li>\n
      • To ensure sufficient liquidity of funds.<\/li>\n<\/ul>\n

        All of these objectives should be kept in mind while preparing a financial plan. However, which objective is to be given more importance and which objective is to be considered less important depends upon the actual circumstances prevailing at the time of preparing the financial plan. Also, necessary changes are made in the financial plan according to the change in circumstances.<\/p>\n

        Question 3.
        \nWhat is ‘Financial Risk?’ Why does it arise?
        \nAnswer:
        \nRisk consideration : Financial risk refers to a position when a company is unable to meet its fixed financial charges namely interest payment, preference dividend and repayment obligation. Apart from the financial risk, every business has some operating risk, (also called business risk).<\/p>\n

        Business risk depends upon fixed operating costs. Higher fixed operating costs result in higher business risk and vice- versa. The total risk depends upon both the business risk and the financial risk. If firm’s business risk is lower, its capacity to use debt is higher and vice-versa.<\/p>\n

        Question 4.
        \nDefine a ‘Current Assets’ and give four examples?
        \nAnswer:
        \nApart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operation of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. Examples of current assets, in order of their liquidity, are as under.<\/p>\n

          \n
        • Cash in hand\/Cash at Bank<\/li>\n
        • Marketable securities<\/li>\n
        • Bills receivable<\/li>\n
        • Debtors<\/li>\n
        • Finished goods inventory<\/li>\n
        • Work in progress<\/li>\n
        • Raw materials<\/li>\n
        • Prepaid expenses<\/li>\n<\/ul>\n

          These assets, are expected to get converted into cash or cash equivalents within a period of one year. These provide liquidity to the business. An asset is more liquid if it can be converted into cash quicker and without reduction in value. Insufficient investment in current assets may make it more difficult for an organisation to meet its payment obligations. However, these assets provide little or low return. Hence, a balance needs to be struck between liquidity and profitability.<\/p>\n

          Current liabilities are those payment obligations which, when they arise, are due for payment within one year, such as Bills payable, creditors, outstanding expenses, advances received from customers etc. Some part of current assets is usually financed through short term sources i.e; current liabilities. The rest is financed through long-term sources and is called net working capital. Thus NWC=CA-CL.<\/p>\n

          \"NCERT<\/p>\n

          Question 5.
          \nFinancial management is based on three broad financial decisions, what are these ?
          \nAnswer:
          \nThere are three basic functions of financial management. These are<\/p>\n

            \n
          • raising finance<\/li>\n
          • investing in assets and<\/li>\n
          • distributing returns earned from assets to shareholders.<\/li>\n<\/ul>\n

            These three functions are respectively known as financing decision, investment decision and dividend policy decision. While performing these functions, various other functions have also to be performed such as taking working capital decisions and planning and controlling the finance.<\/p>\n

            Certain routine functions are also performed for the effective execution of all these finance functions. Hence, the functions of finance are:<\/p>\n

            (i) Determining the financial Needs
            \n(ii) Financing Decision
            \n(iii) Investment Decision
            \n(iv) Working Capital Decision
            \n(v) Dividend policy Decision<\/p>\n

            (i) Determining the financial Needs : The first task of the financial management is to estimate and determine the financial requirements of the business. For this purpose, the short tern) and long-term needs of the business are estimated separately.<\/p>\n

            Financial needs are estimated with a long-term view so that necessary funds will be available for expansion and renewal of plant and machinery in future. While determining the financial needs the financial management should take into consideration the nature of the business, possibilities for future expansion, attitutde of the management towards risk, general economic circumstances, etc.<\/p>\n

            (ii) Financing Decision : This function is related to raising of finance from different sources. For this purpose the financial manager is to determine the proportion L of debt and equity. In other words, what proportion of total funds will 1 be raised from loans and what proportion will be provided by share J. holders. The mixing of debt and equity is known as the firm’s capital structure or leverage.<\/p>\n

            Raising of funds through debts results in a higher return to the share holders but it also increases risk. Hense, a proper balance will have to be ensured-between debt and equity. A capital [ structure with a reasonable proportion of debt and equity capital is ‘ termed the ‘optimum capital structure’.<\/p>\n

            When the return to share-holders is maximized with minimum risk, the per-share market value of company’s shares will be maximized and the firm’s capital structure will be considered optimum. In order to raise the capital, a prospectus is issued and services of underwriters are used.<\/p>\n

            (iii) Investment Decision : Investment Decision also known as ‘Capital Budgeting’ as related to the selection of long-term assets or projects in which investments will be made by the business. Long-term assets are the assets which would yield benefits over a period of time in future.<\/p>\n

            Since the future benefits are difficult to measure and cannot be predicted with certainty, investment decision involve risk. Investment decision should, therefore, be evaluated in terms of both expected return and risk. Further, a minimum required rate of return also known-as cut-off rate l is also determined against which the expected return from new I investment can be compared.<\/p>\n

            (iv) Working Capital Decision : It is concerned with the management of current assets. It is an | important function of financial management since short-term survival of the firm is a pre-requisite for its long-term sucess. Current assets should be managed in such a way that the investment in current assets is neither inadequate nor unnecessary funds are locked up in current assets.<\/p>\n

            If a firm does not have adequate working, capital, that is its investment in current assets is inadequate, it may become illiquid and as a result may not be able to meet its current obligations and,thus, invite the risk of bankruptcy. On the other hand, if the investment in current assets is too large, the profitability of the firm will be adversely affected because idle current assets will not earn anything.<\/p>\n

            Thus the financial management must develop a sound technique of managing current assets. It should properly estimate the current assets requirements of the firm and make sure that funds would be made available when needed.<\/p>\n

            (v) Dividend policy Decision : The financial management has to decide as to which portion of the profits is to be distributed as dividend among shareholders and which portion is to be retained in the business.<\/p>\n

            For this purpose the financial management should take into consideration the factors of dividend stability, bonus shares and cash dividends in practice. Usually, tHe profitable companies pay cash dividends regularly. Periodically, the bonus shares are also issued to the existing equity shareholders.<\/p>\n

            Question 6.
            \nWhat is the main objectives of financial management? Briefly explain.
            \nAnswer:
            \nObjective or Goals of financial Management : It is the duty of the top management to lay down the objectives or goals which are to be achieved by the business. In order to make wise financial decisions a clear understanding of the objectives of the business is necessary. Objectives provide a framework within which various decisions relating to investment, financial and dividend are to be taken.<\/p>\n

            \"NCERT<\/p>\n

            In other words, objectives lay down a criterion by which the efficiency and profitability of a particular decision is evaluated. The choice of such a criterion lies between profit maximization and wealth maximization. Hence, there are two approaches in this regard :
            \n(1) Profit Maximization and
            \n(2) Wealth Maximization<\/p>\n

            (1) Profit Maximization : According to this approach, all activities which increase profits should be undertaken and which decrease profits should be avoided. Profit maximization implies that the financial decision making should be guided by only one test, which is, select those assets, projects and decisions which are profitable and reject those which are not. The following arguments are advanced in favour of this approach :<\/p>\n

            (i) Profit is a test of economic efficiency of a business. It is a yard stick by which the economic performance of a business can be judged.<\/p>\n

            (ii) This approach leads to efficient allocation and utilisation of scare resources of the business because sources tend to be directed to uses which are most profitable.<\/p>\n

            (iii) Profitability is essential for fulfilling the goal of social welfare also. Maximization of profits leads fo the maximization of social welfare.<\/p>\n

            (iv) Profit acts as motivator or incentive which induces a business organisation to work more efficiently. If profit motive is wilthdrawn the pace of development will be reduced.<\/p>\n

            (v) Economic and business conditions go on changing from time to time. There may be adverse business conditions like recession, competition etc. Under adverse circumstances a business will be able to survive only if it has some past earnings to rely upon. Hence, a business should maximize its profits when the circumstances are favourable.<\/p>\n

            (vi) Profits are the major source of finance for the growth of a – firm.However, the profit maximization approach has been criticised on several grounds :<\/p>\n

            (i) Ambiguous : One practical difficulty with this approach is that the term profit is vague and ambiguous. Different people take different meaning of term\u00a0 profit. For example, profit may be short term or long-term, it may be ‘ before tax or after tax, and it may be total profit or rate of profit.<\/p>\n

            ‘Similarly, it may be return on total capital employed or total assets or \u2018 share holders funds and so on. Further, it is possible that total profits may increase but earnings per share may decrease. To illustrate, if a company has 1,00,000 shares and earns a profit of Rs. 10,00,000,earning per share is Rs. 10.<\/p>\n

            Now, if the company further issues 50,000 shares and earns a total profit of Rs. 12,00,000; the total profits have increased by Rs. 2,0, 000; but the earning per share declined to Rs. 8
            \n\\(\\left\\{\\text { i.e. } \\frac{\\text { Rs. } 12,00,000}{1,50,000}\\right\\}\\)<\/p>\n

            Hence, the question aries, which of these profits should a firm try to maximize? .<\/p>\n

            (ii) Ignores the Time Value of money : This approach ignores the time value of money, i.e. it does not make a distinction between profits earned over the different years. It ignores the fact that the value of one rupee at present is greater than the value of same rupee received after one year.<\/p>\n

            Similarly, the value of profit earned in first year will be more in comparison to the equivalent profits earned in later years. To illustrate, the profits of two different projects are<\/p>\n\n\n\n\n\n\n\n
            Year<\/strong><\/td>\nProject A<\/strong><\/td>\nProject B<\/strong><\/td>\n<\/tr>\n
            1.<\/td>\n1,50,000<\/td>\n…………….<\/td>\n<\/tr>\n
            2.<\/td>\n4,50,000<\/td>\n4,00,000<\/td>\n<\/tr>\n
            3.<\/td>\n2.00,000<\/td>\n4,00,000<\/td>\n<\/tr>\n
            Total<\/td>\n8.00,000<\/td>\n8,00,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

            The total profits of both the projects are Rs. 8,00,000 in 3 years and hence, if the profit maximization approach is adopted both the projects will be considered equally profitable. But it can be seen that project A earns higher profits in ealier years and hence is more profitable in terms of time value of money. The profits earned in earlier years can be reinvested to earn more profits.<\/p>\n

            (iii) Ignores Risk factor : This approach ignores the risk associated with the earnings. If the two firms have the same total expected earning, but if earnings of one firm fluctuate considerably as compared to the other, it will be more risky. Investor in general, have a preference for a less income with less risk in comparison to high income\u00a0 greater risk. But this approach does not pay any attention to these factor.<\/p>\n

            \"NCERT<\/p>\n

            It is, thus, clear that profit maximizariterion is inappropriate and unsuitable. It is not only ambiguous kuf$gnis to solve the problems of time value of money and the risk. An alternative to profit maximization, which solves these problems* is the criterion of wealth maximization.<\/p>\n

            2. Wealth Maximization : This approach is now universally accepted as an appropriate criterion for making’financial decision as it removes all the limitations of profit maximization approach. It is also known as net present value (NPV) maximization approach. According to this approach the worth of an asset is measured in terms of benefits received from its use less the cost of its acquisition.<\/p>\n

            Benefits are measured in terms of cash flows received from its use rather than accounting profit which was the basis of measurement of benefits in profit maximization approach. Measuring benefits in terms of cash flow avoids the ambiguity in respect of the meaning of the term profit.<\/p>\n

            Another important feature of this approach is that it also incorporates the time value of money. While measuring the value of future cash flows an allowance is made for time and risk factors by discounting or reducing the cash flows by a certain percentage. This percentage is known as discount rate.<\/p>\n

            The difference between the present value of future cash inflows generated by an asset and its cost is known as net present value (NPV). A financial action (or an asset or a project) which has a positive NPV creates wealth for shareholders and therefore is undertaken.<\/p>\n

            On the other hand, a financial action resulting in negative NPV 1 should be rejected since it would reduce shareholder’s wealth. If one out of various projects is to be choosen, the one with the highers NPV is adopted. Hence, the shareholder’s wealth will be maximized if this criterion is followed in making financial decisions.<\/p>\n

            The NPV can be calculated with the help of the following Formula:-
            \n\\(\\mathrm{W}=\\frac{\\mathrm{A}_{1}}{(1+\\mathrm{K})}+\\frac{\\mathrm{A}_{2}}{(1+\\mathrm{K})^{2}}+—-\\frac{\\mathrm{A}_{\\mathrm{n}}}{(1+\\mathrm{K})^{\\mathrm{n}}}-\\mathrm{C}\\)
            \nWhere W = Net Percent worth
            \nA1<\/sub> , A2<\/sub> \u2014 An<\/sub> = Stream of cash flows expected to occur from a course of action over a period of time.
            \nK = Apporopriate discount rate to measure risk and time factors.
            \nC = Initial outlay to acquire an asset or pursure a course of action.<\/p>\n

            If W or NPV is positive, the firm should acquire the asset or pursure a particular course of action. On the contrary, If W is negative the asset should not be acquired or that particular course of action should not be taken.<\/p>\n

            The wealth maximization approach is superior then the profit maximization approach. Firstly, because it uses cash flows instead of accounting profits which avoids the ambiguity regarding the exact meaning of the term profit. Secondly it gives due importance to the time value of money by reducing the future cash flows by an appropriate discount or interest rate.<\/p>\n

            If higher risk and longer time period are involved, higher rate of discount or interest will be used to find out the present value of future cash benefits. The discount or interest rate will be lower for the projects which involve low risk.<\/p>\n

            \"NCERT<\/p>\n

            Question 7.
            \nDiscuss about working capital affecting both the liquidity as well as profitability of a business.
            \nAnswer:
            \nManagement of working capital : The goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that working capital is maintained at a satisfactory level. The current assets should be large enough to pay the current liabilities in time while not keeping too high a level of anyone of them.<\/p>\n

            The interation between, current assets and current liabilities is, therefore, the main objective of management of working capital. According to Smith, K.V., “Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the after relationship that exists between them?’
            \nFollowing are the main objectives or aspects of working capital management:<\/p>\n

            (1) To determine the adequate or optimum quantum of investment in working capital.
            \n(2) To determine the composition or structure of current assets.
            \n(3) To maintain a proper balance between liquidity and profitability.
            \n(4) To determine the policy or means of finance for current assets.<\/p>\n

            (1) To determine the adequate or optimum quantum of investment in working capital : As discussed, a firm should maintain adequate or reasonable investment in working capital. Investment in working capital should neither be excessive nor inadequate.<\/p>\n

            (2) To determine the composition or structure of current assets : The financial management is required to determine the , composition of current assets. It should decide how much amount 1 should be invested in each individual current assets. For this purpose, it should fix the average amount invested in Stock, debtors, marketable securities and the level of cash balance.<\/p>\n

            (3) To maintain a proper balance between liquidity and profitability : While managing working capital, management will have to reconcile two conflicting aspects. The confliciting aspects are liquidity A I and profitability. If the quantum of working capital is relatively large, -it will increase the liquidity but decrease the profitability.<\/p>\n

            The reason is that a considerable amount of firm’s funds will be tied up in current assets, and to the extent this investment is idle, the firm will have to forego profits. On the other hand, if the quantum of Working capital is relatively small, it will decrease liquidity but will result in increase in V the profitability. This is because the less funds are tied up in idle current assets.<\/p>\n

            (4) To determine the policy or means of finance for current assets : Another important aspect of working capital management is determining the financing mix i.e. what will be the sources of financing the current assets. There are mainly two sources from which funds can be raised for current assets financing<\/p>\n