Changes in current assets hint it is generally easier

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Unformatted text preview: en them by considering changes in current assets and current liabilities separately. Changes in Current Assets Hint It is generally easier to turn receivables into the more liquid asset cash than it is to turn inventory into cash. As we will learn in Chapter 15, the firm can sell its receivables for cash. Inventory has to be sold and then converted to a receivable before it becomes cash. How changing the level of the firm’s current assets affects its profitability–risk tradeoff can be demonstrated using the ratio of current assets to total assets. This ratio indicates the percentage of total assets that is current. For purposes of illustration, we will assume that the level of total assets remains unchanged.2 The effects on both profitability and risk of an increase or decrease in this ratio are summarized in the upper portion of Table 14.1. When the ratio increases—that is, when current assets increase—profitability decreases. Why? Because current assets are less profitable than fixed assets. Fixed assets are mor...
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