Pressure to increase current asset buildup often results from
a .decline in sales growth.
b rapidly expanding sales.
c .increased demands of short-term creditors.
d .none of these.
The correct answer and explanation is :
The correct answer is b) rapidly expanding sales.
Explanation:
When a company experiences rapidly expanding sales, there is often a corresponding increase in the demand for current assets. This is because expanding sales typically require a company to increase its working capital to support the growth. Let’s break down the process:
- Impact on Inventory: As sales grow, companies need to increase their inventory levels to ensure they have enough products to meet the growing demand. This leads to an increase in inventory, which is a key current asset.
- Impact on Accounts Receivable: With rising sales, particularly if the company extends credit to customers, there will also be an increase in accounts receivable. As more goods are sold on credit, the amount owed by customers increases, further putting pressure on the company to manage its current assets effectively.
- Impact on Cash: Rapid sales growth may also lead to a higher volume of transactions, increasing the need for cash to manage day-to-day operations, such as paying suppliers, employees, and meeting other operational costs.
The reason rapidly expanding sales lead to pressure on increasing current assets is primarily tied to the fact that growing sales require companies to purchase more raw materials, manufacture more products, and extend more credit to customers—all of which use up working capital in the form of current assets like inventory and accounts receivable.
Other options:
- a) Decline in sales growth: A decline in sales would actually lead to reduced demand for current assets, as there would be less need for inventory, and accounts receivable would decrease since fewer goods are being sold.
- c) Increased demands of short-term creditors: While increased short-term liabilities may pressure a company to maintain liquidity, this typically influences how much cash or liquid assets a company needs, rather than directly leading to the buildup of current assets themselves.
In summary, rapidly expanding sales necessitate an increase in current assets to support the growth in operations, making b) rapidly expanding sales the correct answer.