The Accounting Review Vol. 35 No. 4 1960
APPRAISING THE DEFENSIVE POSITION OF A FIRM: THE INTERVAL MEASURE.
Abstract
The measurement of a firm's short run' ability to pay its debts as they come due is a very important aspect of financial analysis. A quantitative, formula type of measurement is required for such purposes as bond indentures, bank loans, and comparative analysis of firms, although a subjective analysis of a firm's capacity to withstand temporary delays or declines in receipts may perhaps be more appropriate. At present, the current ratio is generally used for this purpose. The necessity of this relationship is inherent in the purpose for which a firm hold defensive assets. These assets are held as a buffer against the uncertain future flow of funds. There will probably be times when receipts do not come in as quickly as expected or when sales decline temporarily. Conversely, the firm might be faced with a sudden increase in expenditures caused perhaps, by an increase in production in response to an order which must be filled immediately or by the opportunity to make an especially advantageous purchase. Current receivables like cash are also defensive assets. Receivables serve as a substitute for cash, although the amount held at any time is a function of sales and sales policy.
- DOI
- 10.2308/tar-7063343
- Volume
- 35
- Issue
- 4
- Pages
- 633-640
- Language
- en
- Sources
- openalex crossref