A Firm with a High Liquidity Ratio Is Definitely Practising

question 36

Multiple Choice

A firm with a high liquidity ratio is definitely practising effective working capital management.This statement is:

• A)True, higher liquidity means that the firm has more cash than it spends.
• B)False, higher liquidity means payables are paid much later than receivables and this hurts the firm's reputation
• C)True, higher liquidity ratio means receivables are greater than payables.
• D)False, the firms' working capital management policy may be too conservative or too lenient

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Definitions:

Revenue Accounts

Accounts that record the income generated by a company from its normal business operations or activities.

Liability Accounts

Accounts on the balance sheet that represent obligations or debts a company owes to others.

Accounting Equation

The foundation of double-entry bookkeeping, representing the relationship: Assets = Liabilities + Equity.

Debit-Credit Analysis

A fundamental accounting technique that balances debits and credits in financial transactions to maintain the equation of assets = liabilities + equity.