Question

1. What is the easiest asset to convert into cash and explain why?

2. Revenue generating assets can also be linked to debt. What is the maximum a company can be financed at?

Answer 1

Q1

Easiest asset that can be converted into cash are Liquid Assets

Liquid Assets

Liquid Assets are those assets which can easily be converted into cash in short period of time.

Examples = Money market Instuments, marketable securities, accounts recievable, government bonds , Mutual funds etc.

Formula :

Liquid Assets = Current Assets - Inventory - Prepaid Expense

Liquid assets are often viwed as cash and likewise may be called cash equivalent because the owner of these assets is confident and sure that the asset can easily be exchanged for cash at any point of time.

Liquid assets have the high liquid market with high level of demand and security, Because of these Liquid assets are easily be converted into cash with less or no time.

Q 2

Revenue Generating assets that can be linked to debt

a) Loan Given

Giving loan to someone at an agreed interest rate brings regular income to the company in the form of interest and is debt for other party.

b) Fixed Deposits

Keeping money in the bank accountsfor a certain fix period (say 2 year) will give you higher interest rate than the saving account.

Q What is the maximum a company can be financed at?

The maximum amount the company is allowed to raised through share is called authorised capital.

Authorised capital is mentioned in the MOA (Memoandum Of Association) of the company.

The authorised capital of the company is the maximum amount of share capital that the company is allowed to raised.

Athorised capital Can be changed at any time in future afte incorporation of the company by following necessary steps required by law