1. Since the mid-1960's, corporate liquidity has been declining. What reasons can you give for this trend?
I think the reason for less liquidity since mid-1960’s is due to efficiency in management, use of cash flow, and the potential of maximizing earnings of a firm’s money. As our text puts it, it can be “traced to more efficient inventory management such as just-in-time inventory programs, point-of-sales terminals, more efficient cash management, electronic cash flow transfer systems, and the ability to sell accounts receivable through the securitization of assets” (Block, Hirt, & Danielsen, 2015, p. 179). Properly managing cash flow allows a firm to maximize earnings on every dollar, rather than letting it sit.
2. If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?
As firms reduce carrying costs and make ordering more efficient, just-in-time inventory systems typically have an effect of reducing the number of suppliers, and using suppliers and manufacturers located near each other (Block, Hirt, & Danielsen, 2015, p. 216). However, as our text also suggests, it would be a good idea to have suppliers in other areas to prevent a halt due to unforeseen circumstances like natural disasters. One lapse, can bring the entire process to a halt as businesses may not maintain extra inventory. Less suppliers are need with the system to work, and ensure quality.
3. Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain.
If a firm issues commercial paper to receive funding from an investor, the money earned is an asset that can be used to purchase inventory, however it is also a liability which needs to be paid back. In essence, it should be treated as a loan. There is also a risk that the current assets or inventory it is used for, could go down in value if you have an asset backed commercial paper, this would...
References: Block, S. B., Hirt, G. A., & Danielsen, B. R. (2015). Foundations of Financial Management (15th ed.). New York, NY: McGraw-Hill.
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