Important information about Maturity Matching Principle
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Explain why maturity matching principle is important when assessing the use of long-term versus short-term financing, and how a mismatch can be costly to an organization.© BrainMass Inc. brainmass.com March 6, 2023, 2:39 pm ad1c9bdddf
For this question, the first thing you may want to do is define what is the maturity matching principle; after which you may tell why it is important when assessing the use of long-term versus short-term financing and how a mismatch may be costly to any organization. Note the following excerpt:
The maturity matching principle states that short-term assets should be financed with short-term financing and long-term assets with long-term financing. Short-term or current assets include cash and inventory. Short-term financing sources include accounts payable and short-term loans. Long-term assets include buildings and equipment. Long-term financing sources include long-term debt, common stock and preferred stock. (Source: ...
This solution first tells what is the maturity matching principle. It then gives reasons as to why the maturity matching principle is important when assessing the use of long-term versus short-term financing.