Explain the term liquidity and how it relates to the classified balance sheet. Why is it...

Explain the term liquidity and how it relates to the classified balance sheet. Why is it important to classify accounts in order of their liquidity?

Expert Solution

Liquidity means the cash conversion/equivalent value of the asset.

The liquidity relates to the balance sheet towards the presentation of assets in order of their liquidity in the assets column in the balance sheet and in the order of the amount of time the asset would usually take to convert them into cash. Thus, in the defined cash is always presented first and then followed by other assets like marketable securities, accounts receivable, inventory, fixed assets and at the last the goodwill.

The importance of presentation of the balance sheet in order of the liquidity nature of the assets is that the management and other user of the balance sheet would able to know how the firm is performing in terms of liquidity and in case of emergency will the firm will able to convert its assets into cash. It will provide confidence to the creditors towards the firm not going into liquidation and their investment is safe.

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ekkarill92 answered 2 years ago

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