Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Types of Receivables

Financial Accounting

7. Receivables and Investments

Types of Receivables

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Multiple Choice

Which of the following statements is correct regarding the liquidity of merchandise inventory and accounts receivable?

Neither merchandise inventory nor accounts receivable can be converted to cash.

Both merchandise inventory and accounts receivable are equally liquid.

Merchandise inventory is generally converted to cash more quickly than accounts receivable.

Accounts receivable are generally converted to cash more quickly than merchandise inventory.

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Verified step by step guidance

Understand the concept of liquidity: Liquidity refers to how quickly an asset can be converted into cash without significant loss of value. In financial accounting, assets like accounts receivable and merchandise inventory have different levels of liquidity.

Analyze accounts receivable: Accounts receivable represent amounts owed to the company by customers for goods or services already delivered. These are typically converted to cash when customers pay their invoices, which is usually within a short period (e.g., 30-90 days).

Analyze merchandise inventory: Merchandise inventory consists of goods held for sale. To convert inventory into cash, the company must first sell the goods, which may take time depending on market demand, sales cycles, and other factors. After the sale, the company may still need to wait for payment if the sale is made on credit.

Compare liquidity: Accounts receivable are generally considered more liquid than merchandise inventory because they represent amounts already earned and are closer to being converted into cash. Inventory requires additional steps (selling and potentially waiting for payment) before it can be converted into cash.

Conclude the correct statement: Based on the analysis, the correct statement is that accounts receivable are generally converted to cash more quickly than merchandise inventory.