2.1 Liquidity. What does liquidity measure? Explain the trade-off a firm faces between high-liquidity and low-liquidity levels.

2.2 Accounting and Cash Flows. Why is it that the revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during a period?

2.3 Book Values versus Market Values. In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?

2.4 Operating Cash Flow. In comparing accounting net income and operating cash flow, what two items do you find in net income that are not in operating cash flow? Explain what each is and why it is excluded in operating cash flow.

2.5 Book Values versus Market Values. Under standard accounting rules, it is possible for a companys liabilities to exceed its assets. When this occurs, the owners equity is negative. Can this happen with market values? Why or why not?

2.6 Cash Flow from Assets. Suppose a companys cash flow from assets was negative for a particular period. Is this necessarily a good sign or a bad sign?

2.7 Operating Cash Flow. Suppose a companys operating cash flow was negative for several years running. Is this necessarily a good sign or a bad sign?