Too much investment in current assets reduces firm's profitability, whereas too little investment in current assets increases the risk of not being able to pay debts as they come due.

Question

Quizplus · Accepted Answer

This statement is true. Investing too much in current assets such as inventory, accounts receivable, and cash can reduce profitability due to the opportunity cost of not utilizing those resources elsewhere. On the other hand, not investing enough in current assets can lead to a liquidity crisis where the firm is unable to pay its debts as they come due, increasing the risk of default. A balance between the two is necessary for a company's financial health.

Too Much Investment in Current Assets Reduces Firm's Profitability, Whereas