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Chapter 3: Q1DQ (page 218)

In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

Short Answer

Expert verified

The cash and marketable securities are used to manage the liquid assets and secure the liquidity risk, not generate profits.

Step by step solution

01

Meaning of management of liquid assets

The liquid assets should be appropriately managed to prevent the liquidity risk of an organization. This process requires the organization to manage its assets and short-term liabilities properly.

02

The primary concern in cash and marketable securities

The cash and marketable securities are utilized to meet the organization's contingency and liquidity purposes. These securities are used for securing the organization against any liquidity risk. These securities are not used for profit maximization purposes.

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Most popular questions from this chapter

Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

a. Fill in column (4) for each month.

Age of receivables April 30 20X1

1

2

3

4

Month of sales

Age of accounts

Amounts

Percent of amount due

April

0-30

\(131,250

____

March

31-60

\)93,750

____

February

61-90

\(112,500

____

January

91-120

\)37,500

____

Total receivables

$375,000

100%

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

Discuss the relative volatility of short- and long-term interest rates

What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?
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