Optional investment in current assets i.e. liquidity management is important because current assets are non-earning assets.
Current assets affect the firm’s financial risk.
The consideration of the level of investment in current assets should avoid 2 danger point’s i.e. excessive and inadequate investment in current assets.
• Excessive investment in current assets impairs profitability because idle cash earns nothing.
• Inadequate investment can threaten the solvency of the firm if it fails to meet its current obligations.
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