Evaluating a Firm's Cash and Cash Equivalent Position: Factors Affecting Liquidity

Factors Affecting Liquidity of a Firm's Cash and Cash Equivalent Position

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Question

What should an analyst look for when evaluating a firm's cash and cash equivalent position that would cause the firm's cash position to be less liquid?

Answers

A. The amount of stock dividends required during the coming year.

B. None of these answers.

C. All of these answers.

D. Potential limitations on the use of cash such as restricted balances.

E. The amount of deposit collection float.

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Explanations

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A. B. C. D. E.

Companies may have restrictions place upon the disposition of the cash position. For example, a firm may maintain cash equivalents that are earmarked for plant expansion, sinking fund payments, or legally restricted compensation balance requirements. A careful review of the firm's operations must be undertaken to uncover any cash or cash equivalents that are restricted from use in the general operation of the business.

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