Primary/Secondary Source of Liquidity

CFA Level I
#1

Hey guys.

I just saw a question asking which of the following is most likely a secondary source of liquidation

a. liquidating inventories

b. trade credit

c. bank line credit

I left a out, because I thought of it as it were selling its inventories, but I guess it doesn’t mean that. I chose b, but it says that a is the answer. Can somebody enlighten me? I don’t get why liquidating inventories is a secondary source of liquidation.

#2

Liquidating can possibly mean selling at almost any price. It comparable to going to a pawn shop - something you would only in a dire situation. That is why it is a secondary source of liquidity.

#3

It is inventory liquidation because you will resort liquidating your inventory if you don’t have access to liquidity (trade credit, bank loan, line of credit, which are all primary source of liquidity) on time.

This means you will start selling the inventory at any price so as to meet up with obligations as they come due.

#4

Secondary source of liquidity whatever is emergency when primary sources are unavailable, thus asset liquidation (for bargain prices as olajidean mentioned), tax evasion, smuggling etc…

#5

Thanks guys!

#6

You are welcome.