Which of the following actions would decrease a firm's liquidity?
A) selling stock and reducing accounts payable
B) selling machinery and using proceeds to retire bonds
C) reducing accounts receivable and buying bonds
D) selling bonds and holding proceeds in the cash account

Question

Quizplus · Accepted Answer

Reducing accounts receivable (converting them into cash or reducing the amount outstanding) and then using that cash to buy bonds (an investment) would decrease a firm's liquidity. Liquidity refers to the ease with which assets can be converted into cash without significant loss in value. Bonds, although relatively liquid, are not as liquid as cash or accounts receivable, which can more readily be turned into cash.

Which of the Following Actions Would Decrease a Firm's Liquidity