liquidity

Question 1

liquidity

Answer 1

The ability of an enterprise to convert its assets into cash is known as liquidity.

Question 2

about liquidity

Answer 2

An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors. It means the enterprise is solvent – can pay its debts.​

An enterprise with poor (negative) liquidity may not be able to pay its debts. The enterprise may become insolvent and have to cease trading.​

Question 3

Current ratio​

Answer 3

This is the ratio of total current assets and liabilities. It includes both cash and inventory (stock). It is a useful measure of the enterprise’s ability to pay its debts, but may be misleading if current assets largely consist of inventory.​

Question 4

Liquidity ratios​

Answer 4

If an enterprise needs to pay debts in the near future, such as wages, it will need to have cash. The liquid capital ratio is a more accurate measure of the enterprises liquidity, as it removes inventory (stock) from the calculation, since stock may be difficult to turn into cash quickly