Permanent current assets have to retain in business for longer period. The liability to settle short term debt arise in short span of time therefore the business has to sell off/realize the permanent current asset to settle the short term debt liability. Whereas, the long term debt remains for longer period and liability to settle the long term debt arise after long span of time. If the business finance its short term current assets with long term debt then the business can realize the cash from short term current asset before the liability of long term debt arises. Therefore, financing the permanent current assets from short term loan is more riskier. However, it is always prudent to finance permanent current asset from long term source of capital and current asset (short term) from short term capital.
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Suryaneel Kumar CMA,ACCA
Director/Manager
Sohar Industrial Port Company
Mumbai MH
India
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Original Message:
Sent: 04-28-2022 09:03 PM
From: Noor Jarrar
Subject: Working Capital Question
Why is financing permanent current assets with short-term debt riskier than financing fluctuating current assets with long-term debt?
I appreciate all replies and thoughts
Thanks!
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Noor Jarrar
Student
Amman
Jordan
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