Question

PLEASE RESPOND IN 150-200 WORDS THANK YOU!

Why must management distinguish between current assets that can be easily converted to cash and those that are more permanent?

Answer 1

difference between the current assets and the quick assets (which are easily convertible into cash) is that the latter offers a more conservative view of the company’s ability to meets its short -term liabilities with its short-term assets because it does not include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory (and other less liquid assets) the quick assets focuses on firm's ability in payment of current liabilities.

With lack of difference between these two , management may suffer in most liquidity payments because of unavailability quick assets, if management able to differentiate they are plan according to that needs , otherwise they will suffer at the time liquid payments. Don't think inventories and other current assets are quick and readily available to pay liabilities , if considers the same you may suffer in payments and some times you may lose your reputation also.

So, management must distinguish between current assets that can be easily converted to cash (quick assets) and that are more permanent.