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In: Accounting

Explain what it means when it is stated that a company has a liquidity issue or...

Explain what it means when it is stated that a company has a liquidity issue or problem versus when it has a solvency issue or problem.  

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Expert Solution

In my words first i will explain about liquidity

liquidity issues or problems means a company has a temporary cash flow problem.

Its assets are greater than its debts, but some assets are illiquid

although in financial books assets are greater than debts, but it can’t meet its current payment requirements.

Solvency issue or problem:

A Company has debt  that it can’t meet through its assets.

i.e. even if it could sell all its assets, it would still be unable to repay its debts.

iquidity Ratios for calculate the assets and liabilities:

  • Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets – Inventories) / Current liabilities??

Solvency Ratio for calculate the assets:

  • Debt to assets = Total debt / Total assets
  • Debt to equity = Total debt / Total equity

Interest coverage ratio = Operating income (or EBIT) / Interest expenses

If you have any doubts ask me..

ekkarill92 answered 1 year ago
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