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AICPA Exam CPA-Business Topic 2 Question 59 Discussion
Topic #: 2
When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying:
Choice 'a' is correct. Appropriate working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset.
Choice 'b' is incorrect. Return maximization seeks to obtain the optimal return rate by asset utilization. It is not necessarily related to the maturity of the asset.
Choice 'c' is incorrect. Financial leverage is the amount of debt used to finance an asset. Higher leverage equals more debt. It is unrelated to the maturity life of an asset.
Choice 'd' is incorrect. Operating leverage is the degree that fixed costs are used in the production process. Operating leverage is unrelated to the methods used to finance assets.
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