Question

In: Finance

List the benefits and costs of: a. Cash and equivalents b. Receivables c. Inventory

List the benefits and costs of:

a. Cash and equivalents b. Receivables c. Inventory

Solutions

Expert Solution

a) Cash and equivalents

Benefits:

Cash and equivalents are the easiest to liquidate and thus improve on the short term and long term liquidity ratios.

Costs:

Too much cash and equivalents is considered to be detrimental since such liquid asset cannot be utilized to generate higher return by investing in any long term assets

b) Receivables

Benefits:

Higher receivables improve the relationship with the customer since they are offered comfortable payment terms. Also, higher receivable is a sign of increase in cash flows to the firm in the short run

Costs:

Higher receivables increase the chances of doubtful debt and is also an indication that the firm could not negatiate favorable terms with the customer

c) Inventory

Benefits:

Higher inventory ensures that there is no shortage in production due to shortage of raw materials and other liquid assets. This ensures that the firm can undergo its production at full capacity

Costs:

More than optimal inventory is detrimental since it indicates inefficiency of the firm to optimally maintain its inventory. Also, more than needed inventory increases the debt costs and hence increases the interest costs.

jeff jeffy answered 2 years ago
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