What are the Liquid Assets?
Liquid assets are those that can be swiftly and readily converted into cash. Examples of liquid assets include cash, money market instruments, and marketable securities. Tracking liquid assets as a percentage of net worth can be an issue for both people and corporations. Liquid assets are recorded on a company’s balance sheet as current assets for financial accounting reasons.
A liquid asset is one that has cash on hand or is easily convertible into cash. Cash is the most liquid asset since having it recognized as legal money is the ultimate goal. Because the owner of the asset can quickly and easily swap it for cash in a transaction, assets that can be converted to cash in a short period of time are comparable to cash itself.
Because the owner is sure that the assets may be quickly converted into cash at any time, liquid assets are frequently seen as cash and may also be referred to as cash equivalents.
Liquid assets formula
Additional ratios that are considered when determining how financially solid a company is can be found under the liquidity ratio including:
1. Current ratio
This ratio gauges the company’s financial health. The ideal ratio is typically thought of as 2:1, but it differs from industry to industry.
Current Assets/ Current Liability Formula, where
- Current assets include cash, bank accounts, receivables, loans, advances, and stock.
- Current Liabilities include debts owed to creditors, short-term loans, overdrafts at banks, unpaid bills, and other current liabilities.
2. Quick ratio
The most accurate indicator of the company’s liquidity is this ratio. Compared to the present ratio, this ratio is more cautious. By removing assets that are not in cash from current assets, the quick asset is calculated.
In general, a ratio of 1:1 is considered optimum.
Quick Assets/ Current Liability Formula, where
Inventory – Current Assets – Prepaid Expenses = Quick Assets.
3. Absolute liquidity ratio
This ratio calculates the company’s overall liquidity. This ratio solely takes the company’s cash on hand and marketable securities into account. Only short-term liquidity in the form of cash, marketable securities, and current investments is tested by this ratio. Cash + Marketable Securities / Current Liability is the formula.
4. Basic defense ratio
This ratio calculates the number of days a business can pay its cash expenses without needing additional financing from other sources.
Calculation: (Cash + Receivables + Marketable Securities) x (Operating Expenses x Interest x Taxes) ÷ 365
Liquid assets examples
Assets that are easily convertible into cash are referred to as liquid assets. Even while assets are priceless belongings that may be exchanged for money, not all of your assets can be sold right away for cash or without incurring a loss. Typical liquid assets consist of:
- Treasury bills and treasury bonds
- Certificates of deposit
- Exchange-traded funds
- Mutual funds
- Money market funds
- Precious metals
Liquid assets purpose
An asset that may easily be turned into cash is referred to as liquid. An asset that is easily convertible into cash is comparable to actual cash since it may be sold with little effect on the asset’s value.
Liquid assets vs accounts receivable
Cash, marketable securities, and accounts receivable are examples of liquid assets. Any property that can be swiftly turned into cash qualifies.
Since they are expected to be paid back within a year, accounts receivable are frequently seen as liquid assets. In most cases, inventory that may be reasonably expected to be sold within a year is able to be said the same.
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Location: Lubbock, Texas, United States
Work:Owner/Broker @ HubCityLending
Education:University of Texas at the Permian Basin, Master of Business Administration, 1999 – 2001