Chapter 1, Problem 1.1CTF

Deciding which fixed assets should be purchased is an example of what type of decision?

Summary Introduction

To critically think about: The purchase of a fixed asset along with the decision made.

Introduction:

The long-term tangible piece of property that a firm owns and utilizes for the production is a fixed asset. The firm cannot consume or convert the fixed asset to cash at least a year of time. The fixed assets are collectively termed as “plant”.

The financial manager is the key person who takes an effective financial management decisions. The three types of financial decisions are as follows:

• Capital budgeting
• Capital structure
• Working capital management

Explanation of Solution

The type of decision for purchasing the fixed asset:

Deciding the fixed assets that must be purchased is an example for working capital management decision and financial management decision. The working capital refers to the short-term liabilities such as the money that must be paid to the suppliers and short-term assets are the inventories of the firm.

Pictorial representation:

Deciding to purchase the fixed asset is as follows:

Conclusion

Managing working capital refers to the day-to-day activities of the firm, which ensures that there are enough resources to continue the operations of the firm. Working capital management decisions are taken based on the management of short term assets and short term liabilities of an organization.