Answer (C) is correct . A conservative working capital policy minimizes liquidity risk by increasing net working capital (current assets – current liabilities). The result is that the company forgoes the potentially higher returns available from using the additional working capital to acquire long-term assets. A conservative working capital policy is characterized by a higher current ratio (current assets ÷ current liabilities) and acid test ratio (quick assets ÷ current liabilities). Thus, the company will increase current assets or decrease current liabilities. A conservative policy finances assets using long-term or permanent funds rather than short-term sources.
Answer (A) is incorrect because A decrease in the acid test ratio suggests an aggressive policy. A conservative company wants a higher acid test ratio, that is, more liquid assets relative to liabilities.
Answer (B) is incorrect because A conservative company wants working capital to be financed from long-term sources.
Answer (D) is incorrect because A conservative company seeks more liquid (marketable) investments.
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