how to calculate liquid assets?Explain !
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how to calculate liquid assets?Explain !
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What Is a Liquid Asset?
A liquid asset is an asset that can easily be converted into cash in a short amount of time. Liquid assets include things like cash, money market instruments, and marketable securities. Both individuals and businesses can be concerned with tracking liquid assets as a portion of their net worth. For the purposes of financial accounting, a company’s liquid assets are reported on its balance sheet as current assets.
Analyzing Liquid Assets
In business, liquid assets are important to manage for both internal performance and external reporting. A company with more liquid assets has a greater capability of paying debt obligations as they become due.
Companies have strategic processes for managing the amount of cash on their balance sheet available to pay bills and manage required expenditures. Industries like banking have a required amount of cash and cash equivalents that the company must hold to comply with industry regulations.
There are several key ratios analysts use to analyze liquidity, often called solvency ratios. Two of the most common are the quick ratio and the current ratio. In the current ratio, current assets are used to assess a company’s ability to cover its current liabilities with all of its current assets and to survive unplanned and special circumstances like a pandemic.
The quick ratio is a more stringent solvency ratio that looks at a company’s ability to cover its current liabilities with just its most liquid assets. The quick ratio does include accounts receivable.
IMPORTANT : The quick ratio and the current ratio are key financial statement ratios used to break down liquidity levels and analyze solvency.