contestada

A firm’s liquidity level decreases when:_______.
a) inventory is purchased with cash.
b) inventory is sold on credit.
c) inventory is sold for cash.
d) an account receivable is collected.
e) proceeds from a long-term loan are received.

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eooyibo123

Answer:

b) inventory is sold on credit.

Explanation:

Liquidity is defined as the a business to use its current assets to settle it's current liabilities.

This is calculated by using the working capital ratio.

Working capital ratio = Current assets ÷ Current liabilities.

Cash and inventory contribute to a business' liquidity.

When inventory is sold on credit, it does not result in immediate increase in cash as payment is in the future. So there is a reduction in the current asset of the company.

A reduction in the numerator of the working capital ratio results in lower value of the ratio (lower liquidity)

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