Week 1 Forum 2

Week 1, Forum 2
Name
Institution

Week 1, Forum 2
The decision on whether or not to reduce or increase current assets is one that must be approached with caution. That is because current assets are a reflection of the company’s liquidity since they can easily be converted into short-term positive cash flow to meet the company’s immediate financial needs. In addition, the value of current assets shows the company’s ability to be solvent by paying out dividends to shareholders and meet its financial obligations. Besides that, the value of the current assets is a reflection of the company’s creditworthiness since it shows that the company can generate cash for financing its activities without going into long-term debt. As such, it would be important for the company to maintain its current assets so as to aid in predict the probability, timing and amount of future cash flows thereby acting as a reflection of financial flexibility and liquidity. These three reasons would justify the decision to retain current assets since they provide some financial stability and security for the company. Also, it should still be noted that current assets are a way of holding cash for the company. On the other hand, it should be noted that current assets serve as a source of ready cash and should be used as such. This means that if the company needs ready cash then it should consider reducing the current assets and turning them into cash after determining that such a decision will not have a negative impact on the company’s creditworthiness, financial flexibility and liquidity.

Additionally, reducing the current assets would only have a short term effect on turning the cash flow positive (Maynard, 2013). As such, it would be prudent for the company to only consider reducing the current assets only if it has an immediate need for money.

Reference
Maynard, J. (2013). Financial Accounting, Reporting, and Analysis. Oxford: Oxford University Press.