Question

If a business organisation decides to purchase raw material on a contractual basis (say 2yrs) then it is a long term investment decision?

Answer 1

Dear student,

Purchase of raw material will be considered as short term investment even though it enters into 2 years contractual basis. This is because payment of raw material would be done on daily basis as regular good and it is not confined to just one time payment like machinery. The working capital would be required on day to day basis for the purchase of raw material but in case of long term investment good one time investment is required. Therefore, we can say the purchase of raw material is a short term investment decision.

Regards