AICPA Exam CPA-Business Topic 2 Question 46 Discussion

Choice 'c' is correct. The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations.

Choices 'a' and 'b' are incorrect because the use of long-term debt financing produces the smallest risk of being unable to meet maturing obligations.

Choice 'd' is incorrect because, although financing fluctuating current assets with short-term debt exposes the firm to some risk, it is not the greatest or the smallest.