relationship exists between a firm's liquid asset balance and shortage costs.

Question

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Shortage costs typically arise when a firm does not have enough liquid assets to meet its obligations, such as paying suppliers or servicing debt. Therefore, as a firm's liquid asset balance decreases, the likelihood and magnitude of shortage costs increase. This shows an inverse relationship between a firm's liquid asset balance and shortage costs.

Relationship Exists Between a Firm's Liquid Asset Balance and Shortage