Question

2. Explain (with examples) any two of the following a. Liquidity b. Market versus Book Value c. Average versus Marginal Tax Rate d. The Cash Flow Statement

Answer 1

A. Liquidity is the ability of an asset to get converted into cash. It reflects the conversion of a security into cash without much depreciation in it's value.In other words , it can be defined at the ease at which the assets are converted into cash without any depreciation in value

The assets which can be quickly converted into cash are termed as highly liquid assets. Cash is the most liquid asset. Assets which are highly liquid are always preferred and they also offer a high degree of certainty and their value can be easily discovered as they can be easily converted into cash.

Example could be derived from the stock markets as highest transacted stocks will have highest liquidity.

B.Market value of an asset is the value at which it can be bought and sold in the market. This is highly updated as market value is decided by twin factors of demand and supply to discover prices regularly.

Example is when a stock is transacted In the stock market, there is continuous price discovery through stock exchanges.

B. Book value of an asset is the value at which it is recorded in the books of accounts. It is the historical prices at which an asset is recorded in books of accounts. This is not updated and often lead to distorted presentation of figures.

Example is price at which land and buildings are recorded in the books of accounts which are completely different from current market price.