Asked by Emaree Reeves on May 10, 2024
Verified
Accounts receivable and inventory are some of the most liquid assets a firm owns and their market value is typically fairly close to book value. Even so, in the eyes of many lenders, these assets make for inadequate collateral on loans, particularly if the business looking to borrow the money is in a liquidity crisis. Why do you think this is the case?
Inventory
A company's stock of the products available for sale to customers, as well as raw materials and work-in-progress that will eventually become finished goods.
Accounts Receivable
Funds that are due to a business from its clients for goods or services already provided but not yet compensated for.
Liquidity Crisis
A situation where an entity lacks the liquidity necessary to meet its short-term obligations, potentially leading to insolvency.
- Identify the reasons why accounts receivable and inventory, despite being liquid assets, may be considered inadequate collateral by lenders.
Verified Answer
Learning Objectives
- Identify the reasons why accounts receivable and inventory, despite being liquid assets, may be considered inadequate collateral by lenders.
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