Question

explain in detail the concept of liquidity

Answer 1

Liquidity means in simple terms availability of cash. In business terms,it is the quick assets like cash and cash equivalence which are easily convertible into cash. Cash is ultimate liquid asset. An degree of liquidity to an asset descrcribes how quickly an asset or security can be converted into cash or can be brought or paid.

For example,

Situation -1:if Mr. A wants to purchase a land,his source is cash then he can quickly brought the land.

Situation-2:mr.A wants to buy a land but he doesn't have cash but have a Machine  which should sold in market at prevailing market rate. By sale you may or may not be able to buy land because of market rates. Therefore,you cannot buy land immediately because of non availability of liquid sources.

The creditors or bankers always a check liquidity ratio of company before providing assurance hence there must be mimimum 1. I. E it should be able to pay short terms debt or obligation of the company. The liquidity funds should be more than its current liabilities.