Instalment payments defer cash outflows, reducing overdraft usage

Steps:

• Purchasing a non-current asset typically requires full payment, drawing heavily on the bank overdraft.
• Opting for instalments spreads payments over six months, minimizing initial cash outflow.
• During this period, smaller periodic payments result in less overdraft utilization compared to full upfront payment.
• Thus, the bank overdraft balance remains lower throughout the six months.

Why A is correct:

• Overdraft represents short-term borrowing for cash needs; deferred payments under instalments reduce immediate borrowing, keeping the overdraft lower per the cash flow definition.

Why the others are wrong:

• B: Instalments create current liabilities, increasing the denominator in current ratio (current assets/current liabilities), likely lowering it.
• C: Liquidity measures short-term solvency; future instalment obligations reduce available cash for other needs, not increasing liquidity.
• D: Six-month instalments classify as current liabilities, not non-current (due within one year).

Final answer: A