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A flexible short-term financial policy will tend to have more of which of the following than a...

Question:

A flexible short-term financial policy will tend to have more of which of the following than a restrictive short-term financial policy will?

a) uncollectable accounts receivable

b) work stoppages for lack of raw materials

c) carrying costs

d) obsolete or out-of-date inventory.

Financial policy:

The procedures adopted by firms to manage, supervise, and control the payment and receipt systems are known as a financial policy. The government sets financial policies based on the industries, whereas some financial policies are set by the firms internally.

Answer and Explanation:

The correct options are a) uncollectable accounts receivable, b) work stoppages for lack of raw materials, and, d) obsolete or out-of-date inventory.

In a flexible short term financial policy, a company maintains a high ratio of current assets to sales revenue generated. It is optimal to use this policy when the line stoppage cost is lower than the inventory carrying cost. Lower inventory directly results in loss of opportunities in sales, eventually resulting in receivables opportunities being untapped on time. Lower inventory results in the stoppage of work more often. Last-minute purchase and loss of opportunity may lead to out of date or obsolete inventories in hand.


Learn more about this topic:

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Financial Policy & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 14 / Lesson 2
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