Question

In: Finance

5. A) If You had $10,000 in liquid assets and $5,000 in current liabilities, you would...

5. A) If You had $10,000 in liquid assets and $5,000 in current liabilities, you would have a liquidity ratio of?

b) What does it mean?

Expert Solution

5. a)

Liquidity ratio

=

Liquid assets / Current Liability

=

$ 10,000.00

/

$ 5,000.00

=

2.00

5. b)

Liquidity ratio represent liquidity of company with respect to its current liability.

Liquid assets are those assets which are readily convertible into cash.

Any entity has many current assets.But, all current assets like Inventory and Prepaid Expenses are not readily

convertible into cash like Cash balance at bank, short term marketable securities etc.

So, in summary, it is the capability of company to have liquid assets which can be easily converted into cash and be used for the payment of its current liability.

jeff jeffy answered 2 years ago

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