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- term Liquidity

ty refers to the availability of company resources to

term cash requirement

anys short-term liquidity refers to its ability to meet


f liquidity can implies that the company is unable to t

age of favorable discounts.
implies limited opportunities and constraints on
ements part.

xtreme liquidity problems can lead to forced sale of

ments and assets
hen a companys owner possess unlimited liability lack of
uidity endangers their personal assets.

a creditor a lack of liquidity can delay in collecting interest a

ncipal payments.

easure of liquidity:
rrent Ratio
levance of the current ratio

urrent liability coverage

uffer against losses

eserve of liquid funds.

tations of the current ratio

sure and predict the pattern of future cash inflows


sure the adequacy of future cash inflows to outflows

a static measure of resources available at a point in

current reserve of cash does not have logical or cau

on to its future cash inflows
rade cycle Analysis:
mpanys working capital requirements are affected b
sired inventory investment and the relation between
t terms and from suppliers and those extended to
mers. These consideration determine a companys n
cycle. This is the working capital management effic
Selected financial information from X company, for the end o
Year 1

Sales for year 1 3,60,000

Receivables 40,000
Inventories* 50,000
A/P** 20,000
Cost of goods 3,20,000
depreciation of

* Beginning inventory is 1,00,000

** we assume these relate to purchase included in costs of goods sol
We estimate companys purchases per day as:

Ending Inventory 50,000

Cost of goods sold 3,20,000
Less: beginning 1,00,000
Cost of goods 2,70,000
purchased and
Less: depreciation in 30,000
cost of goods sold
=Purchases 2,40,000
Purchases per day 2,40,000/360=666.67
he net trade cycle for X company (in days)

Accounts receivable = 40,000/(3,60,000/360) = 40 days

nventories =50,000/(3,20,000/360)=56.24 days

96.24 days

ess: Accounts payable=20,000/666.67 = 30 days

Net trade cycle = 66.24 days

e daily sales is (3,60,000 /360)=1000 then required working

pital would be 1000*66.24 =66,240