Question

Which of the following will improve liquidity?

1. A company purchases a new truck with cash.
2. A company receives cash from taking out a long-term loan that is due in five years.
3. A company substantially increases credit sales and expects to collect all of the credit sales in the current account period.

4. A company purchases inventory on credit but is having trouble selling the inventory as most of it has become obsolete.

5. A company took out a long-term loan four years ago. The loan is due next month.

Answer 1

1. In the case where a New Truck is Purchased with Cash, It will lead to Blockage of the fund as current assets are utilized to acquire capital assets. The Capital Assets May Improve the Earning of the Company in near future but for now, it leads to Cash Blockage.

2. Cash Received from Long Term Loan which will be payable in a term of 5 years will improve the Cash Availability with the Company subject to the condition that the same should only be used for working capital requirements of the company. It will Enhance the Liquidity of the Company.

3. Substantially Increase in Credit sale alone will not lead to improving the liquidity as for the increase in credit sale we have to make necessary arrangments regarding cash and stock so as to fulfil the credit sales demand. The Liquidity depends on the fact that how fast the cash is received from them in the current cycle. Delay if any in Receiving cash will leads to blockage of working capital.

4. Company Purchase Inventory on Credit and if it can sale the same in real time and generate cash then it can add to the liquidity of the company, but in this case, the company is facing trouble in managing the Inventory and most of the Inventory become Obsolete and Dead Stock.Hence Liquidity will not increase in this case

5.The Repayment of Long-Term Loan will lead to decrease in Non-Current Liabilities and decrease in Cash Available with the Company. hence the liquidity will not be increased in this case.