FIN 3715 Chapter : Chapter 2 Solutions
Document Summary
Answers to concepts review and critical thinking questions: liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. It"s desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it namely that higher returns can generally be found by investing the cash into productive assets low liquidity levels are also desirable to the firm. Thus, there is a trade-off between relevance (market values) and objectivity (book values): depreciation is a noncash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting. Interest expense is a cash outlay, but it"s a financing cost, not an operating cost: market values can never be negative. Imagine a share of stock selling for .
