Question

According to the hedging principle, which of the following assets should be financed with long term sources of financing?

seasonal increases in accounts receivable

seasonal expansions of inventory

inventory and accounts receivable the firm maintains throughout the year

none of the above

Answer 1

According to hedging principle , the assets which should be financed with long term sources of financing is :-

Inventory and account receivable , the firm maintains throughout the year.

Explanation :- Hedging principle of financing is maturity matching principle which states that fixed assets and permanent portion of current asset must be financed with long term sources of finance and seasonal increase in current asset should be financed with short term sources of finance.

The level of inventory and account receivable the firm maintains through out the year , permanent portion of current asset , so it must be financed with long term sources of finance.