Liquidity

There actually is a point where company can be too liquid-that is, it can have too much working capital (current assets less current liabilities). While it is important to be liquid enough to be able to pay short-term bills as they come due, a company does not want to tie up its cash in extra inventory or receivables that are not earning the company money.

By one estimate, 1,000 large companies had cumulative excess working capital of $764 billion. Based on this figure, these companies could have reduced debt by 36% or increase net income by 9%.

Questions

The article above says Based on this figure, these companies could have reduced debt by 36% or increase net income by 9%.

Explain about the followings. (1) How the firms could have reduced debt by using excess cash.

(2) How the firms could have increase net income by using excess cash.

Important Note: When you explain, you must add journal entries in your explanation.