Which of the following situations would normally involve long-term financing?

• A. Paying monthly utility bills
• B. Buying office supplies for daily use
• C. Covering short-term payroll expenses
• D. Purchasing new manufacturing equipment expected to last 10 years

Answer: (D)

Verified step by step guidance

1. Understand the concept of long-term financing: Long-term financing refers to funding obtained for assets or projects that have a useful life extending beyond one year. It is typically used for investments in fixed assets or large-scale projects.
2. Analyze the options provided: Paying monthly utility bills, buying office supplies for daily use, and covering short-term payroll expenses are all examples of short-term expenses. These are recurring or operational costs that do not require long-term financing.
3. Focus on the correct answer: Purchasing new manufacturing equipment expected to last 10 years is a capital expenditure. Since the equipment has a long useful life, it is appropriate to use long-term financing to match the duration of the asset's benefit.
4. Explain the matching principle: In financial accounting, the matching principle suggests that the financing method should align with the duration of the asset's use. Long-term financing is suitable for assets like manufacturing equipment because the repayment period can be spread over the asset's useful life.
5. Conclude the reasoning: Long-term financing is typically used for investments in fixed assets, such as manufacturing equipment, because these assets provide benefits over an extended period and require significant upfront costs that are impractical to cover with short-term funds.