Accounting Multiple Choice Question – 29 January 2025

Alex plc is trying to decide on its optimal level of current assets.

The company’s management face a trade-off between?

Select ONE answer:

1. Profitability and risk
2. Inventory and receivables
3. Equity and debt
4. Short-term and long-term borrowing

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > All businesses face a trade-off between being profitable and being liquid. Less liquidity may yield greater profitability, but less liquidity equals greater risk. As both inventory and receivables (2) are current assets the trade-off between these does not affect the overall level of the value of current assets. The equity and debt (3) trade-off is concerned with long-term capital structure rather than current assets. The short-term versus long-term borrowing trade-off (4) is a financing decision unrelated to current assets.
2. Not correct
3. Not correct
4. Not correct

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