Answer (D) is correct . A conservative working capital policy results in an increase in working capital (current assets – current liabilities). It is typified by a reduction in liquidity risk. Increasing the current ratio, whether by decreasing current liabilities or increasing current assets, minimizes the risk that the company will not be able to meet its obligations as they fall due. Thus, an increasing ratio of current to noncurrent assets means that a company is forgoing the potentially higher returns on long-term assets in order to guard against short- term cash flow problems.
Answer (A) is incorrect because An increase in current liabilities relative to noncurrent liabilities would increase liquidity risk.
Answer (B) is incorrect because A decrease in the normal operating cycle permits a lower level of working capital. If assets can be converted to cash more quickly, current assets can be reduced.
Answer (C) is incorrect because A decrease in the quick ratio signifies that quick assets (cash, receivables, and marketable securities) are decreasing relative to current liabilities.
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