Question

For those brave enough to act effectively now to stabilise and protect your business and maintain liquidity, opportunity will come." Explain whether the Statement of Cash Flows is able to illustrate the ‘liquidity' of an entity to its users and provide ONE recommendation how companies can maintain liquidity during this pandemic.

Answer 1

Answer:

1. Yes. Cash flows are able to illustrate liquidity.

2. Recommendations

a. Reducing levels of Inventory.

b. Negotiating Longer credit settlement period with suppliers.

Explanation:

One of the uses of a Cash flow Statement is its use in negotiating loans with bank and other lenders. Of interest to these parties is the liquidity of the entity.

Liquidity is the ability of an entity to honor its short-term obligations using its current assets. Liquidity is reflected in the Cash flow from Operating Activities of the Cash flow Statement.

Recommendation

Companies can maintain liquidity through reducing levels of inventory. Inventory ties up cash. Negotiating longer credit settlement period with suppliers can also increase liquidity.