Which of the following could offset the higher risk exposure a company would face if its current ratio and net working capital were relatively low?
A) Its current assets would need to be highly liquid.
B) Its accounts receivable collection policy could increase the average collection period.
C) It could offer no discounts for early payment by its customers.
D) It could buy back some of its shares in the open market in order to reduce its equity.

Question

Quizplus · Accepted Answer

A company with low current ratio and net working capital has a higher risk exposure, as it may not be able to cover its short-term obligations. However, if the company's current assets are highly liquid, they can be easily converted into cash to meet its obligations. This mitigates some of the risk associated with low current ratio and net working capital. Increasing the average collection period, offering no discounts for early payment, or buying back shares in the open market does not directly address the liquidity issue related to low current ratio and net working capital.

Which of the Following Could Offset the Higher Risk Exposure