Question

Explain the definition, causes and measurement of liquidity.

Explain the definition, causes and measurement of liquidity.

Homework Answers

Answer #1

Definition of liquidity :-

It is basically company ability to convert their asset to cash in order to pay it's liabilities when they become due.

For example

Accounts receivables, inventories , temporary investments are the liquid assets.

Causes of liquidity :-

Liquidity depends upon how the cash inflows or outflows is affected .factors or causes affecting liquidity examples are as follows :-

a.Uncertainity of cash flow projections .

b.Management policies depends either management is risk averse or invest in risk free securities.

c.obsolete inventory , Bad debts etc.

Measurement of liquidity :-

There are various liquidity ratios for measurement of company liquidity .for example :-

a.Current ratios :-

= Current Assets / Current liabilities .

b.Quick ratios :-

(Cash and cash equivalent + current receivable + short term investment )/current liabilities .

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