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Which of the following conditions are most indicative of a company that is effectively managing its cash?
Correct Answer: A
The condition most indicative of a company that is effectively managing its cash is low accounts receivable, low inventory, and high accounts payable. Here's why: * Accounts Receivable (AR): * Low AR: Indicates that the company is collecting its receivables quickly, which means cash inflows are efficient, reducing the days sales outstanding (DSO). * Inventory: * Low Inventory: Implies effective inventory management. The company is not tying up excessive cash in inventory, reducing carrying costs and minimizing obsolescence risks. * Accounts Payable (AP): * High AP: Suggests that the company is taking full advantage of credit terms provided by suppliers, delaying cash outflows and preserving cash within the business for a longer period. By effectively managing these three areas, a company can ensure a positive cash flow, maintain liquidity, and enhance its overall financial health. References * Brigham, E. F., & Houston, J. F. (2018). Fundamentals of Financial Management. * Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2016). Corporate Finance: Core Principles and Applications.