Which procedure involves reviewing the aged receivables analysis to assess liquidity?

Which procedure involves reviewing the aged receivables analysis to assess liquidity?

• A. Review aged receivables analysis
• B. Review latest management accounts
• C. Enquiries of directors
• D. Assess reasonableness of cash flow forecast

Answer: (A)

Assessing liquidity from receivables hinges on understanding when cash is expected to flow in. The aged receivables analysis shows how much is owed and breaks it down by how long each balance has been outstanding. By focusing on the age of receivables, you can spot potential cash collection problems, such as large overdue amounts or a concentration of debt with a few customers, which could threaten short-term liquidity. It also helps you see whether the estimates for doubtful debts are adequate, since higher overdue levels can imply higher credit risk and lower net cash inflows. Other procedures are broader or less directly tied to timing of cash receipts: reviewing management accounts provides overall financial insight but not specifically the timing of cash from debtors; enquiries of directors are information gathering without concrete evidence about collection performance; and assessing the reasonableness of a cash flow forecast depends on forecast assumptions rather than the actual aging and collectability of receivables.

Assessing liquidity from receivables hinges on understanding when cash is expected to flow in. The aged receivables analysis shows how much is owed and breaks it down by how long each balance has been outstanding. By focusing on the age of receivables, you can spot potential cash collection problems, such as large overdue amounts or a concentration of debt with a few customers, which could threaten short-term liquidity. It also helps you see whether the estimates for doubtful debts are adequate, since higher overdue levels can imply higher credit risk and lower net cash inflows.

Other procedures are broader or less directly tied to timing of cash receipts: reviewing management accounts provides overall financial insight but not specifically the timing of cash from debtors; enquiries of directors are information gathering without concrete evidence about collection performance; and assessing the reasonableness of a cash flow forecast depends on forecast assumptions rather than the actual aging and collectability of receivables.