Question

question 5
profitable and growing firms may run short on cash because:
○ of rapid decrease in accounts receivables
○ of rapid growth in accruals
○ of spontaneous increases in receivables and inventories
○ of rapid growth in accounts payable

Explanation:

To determine why profitable and growing firms may run short on cash, we analyze each option:

• "of rapid decrease in accounts receivables": A decrease in accounts receivables means cash is being collected faster, which would increase cash, not cause a shortage. Eliminate this.
• "of rapid growth in accruals": Accruals are non - cash expenses or revenues. Growth in accruals doesn't directly lead to cash shortage as they don't involve immediate cash outflow. Eliminate this.
• "of spontaneous increases in receivables and inventories": When a firm grows, it often needs to extend more credit (increasing accounts receivable) and hold more inventory. Both of these tie up cash. So a growing firm with increasing receivables and inventory can run short on cash even if it's profitable. This makes sense.
• "of rapid growth in accounts payable": Growth in accounts payable means the firm is delaying cash outflows (paying suppliers later), which would increase available cash, not cause a shortage. Eliminate this.

Answer:

C. of spontaneous increases in receivables and inventories