ch2_CRCT - CHAPTER 2 FINANCIAL STATEMENTS TAXES AND CASH...

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Unformatted text preview: CHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. Its desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with itnamely that higher returns can generally be found by investing the cash into productive assetslow liquidity levels are also desirable to the firm. Its up to the firms financial management staff to find a reasonable compromise between these opposing needs. 2. The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be booked when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; its the way accountants have chosen to do it....
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ch2_CRCT - CHAPTER 2 FINANCIAL STATEMENTS TAXES AND CASH...

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