What are Liquid Assets
Liquid assets are assets that can be transformed into cash rapidly, with negligible effect on the price available in the entire market. Such assets comprise of government bonds and money market instruments. The foreign currency market is believed to be globally the highest liquid market across the world since a huge amount of money is being exchanged every day and thus, making extremely difficult for a person to effect the worldwide exchange rate.
List of Liquid Assets
Savings account and cash are believed to be the greatest usual form of highest liquidity being owned by either individuals or businesses or both. However, there are several other assets that are believed to be more liquid, easily capable of being shifted among the owners and such assets that are well-established all through the market. Here is the complete list of liquid assets –
- Cash in Hand
- Cash in Bank
- Cash Equivalents
- Accrued Income
- Promissory Notes
- Government Bonds
- Marketable Securities
- Accounts Receivable
- Certificates of Deposit
- Tax Refunds
Liquid Asset Examples
Liquid Assets Example # 1
- Stock market is believed to be the perfect example of any liquid market as there exists huge numbers of sellers and buyers coupled with several other stocks being examples of liquid assets.
- Considering such asset’s significant trading volume, some equitable securities might fast be transformed into cash. Such types of cases particularly exists for stocks having significant share volume and huge market capitalization.
- Since securities can quickly be sold through electronic markets at complete market prices while in demand, equitable stocks under correct circumstances are liquid.
Liquid Assets Example # 2
- Cash on hand is taken as a liquid asset since its capability of being quickly accessed.
- Since, cash being considered as a legal tender any firm may utilize to resolve its existing liabilities. Assume some company or any person has some cash in a savings or checking account.
- The account’s money is believed to be liquid since it can be taken out quite simply for settling liabilities.
Liquid Assets Example # 3
- Investments are expected to be liquid as they can simply be liquidated.
- For instance, mutual funds, money market funds, bonds and any stock’s shares are believed to be liquid. Such assets can readily be converted into cash whenever any financial emergency situation arises.
- Usually, investments can simply be sold, depending upon the investment.
Current Assets vs Liquid Assets
The above figure shows the differences between Current Assets and Liquid Assets.
- The list of Liquid assets comprises of Cash in Hand, Cash at the bank, marketable securities, other cash equivalents, accounts receivables, accrued income, loans, and advances (short-term) and Trade Investments (Short Term).
- Current Assets includes the list of liquid assets and in addition, also has inventories and prepaid expenses.
Consolidated Liquid Assets
Consolidated liquid assets are securities and cash that can readily be converted into cash, less current liabilities. Consolidated Liquid Asset’s formula is = Marketable Securities + Cash – Current Liabilities
- For example, let’s consider that Ford Motors, Inc. has $2 million in cash as depicted on its balance sheet, $600,000 of marketable securities as well as $4 million in current liabilities. Employing the above-mentioned formula, Ford Motors, Inc. it would be: $2,000,000 + $600,000 – $4,000,000 = -$1,400,000
- In the above example, Ford Motors, Inc. has negative liquidity, which signifies that if the company is asked to pay-off all its current liabilities now, Ford Motors wouldn’t be able to perform such a task.
Obviously, holding sufficient cash on hand for paying off all the debts is a significant benefit to borrowers while comforting for lenders. Therefore, analysts employ this as an extremely stringent parameter of determining the company’s capability to successfully meet its near-term debt commitments.
Features of Liquid Assets
- While there exists no widespread technique for determining typical financial liquidity ratios and their utilization. Such ratios comprise of the quick ratio and current ratio to determine the overall liquidity level depending on the primary asset.
- Such assets need to have well-established markets with sufficient sellers and buyers in order to make sure that the asset’s market price becomes impossible to be simply changed or manipulated. Any organization must possess the capability to assign the asset’s ownership easily and fast at a complete market price. Further, the asset is expected to be illiquid if any discount gets applied to its sales price.
- On the balance sheet, assets are recorded as per liquidity with the highest liquid items itemized first. Therefore, cash is recorded as the very first current asset since it is the highest liquidity. Subsequently, cash equivalents are consolidated with cash in the very first line as they signify convertible and demandable instruments present for an instant change. Cash is usually followed by goodwill, fixed assets, inventory, accounts receivable, and marketable securities.
- Liquid items being a key classification for lenders and creditors. Any company having greater quantities of such assets possess improved ability to pay debt commitments with their occurrences. Hence, the process of recording illiquid and liquid items seems useless for financial institutions like banks, management and for certain external requirements otherwise the total of liquid items sometimes prove valuable while making strategic loan preparations. Further, emergency deposits are naturally held back in form of such assets to be accessed easily.
Why having Liquid Assets is essential for the business?
While evaluating investments, and considering one’s complete financial condition, liquidity might be a key factor. Essentially, liquidity considered to be any firm’s capability to easily convert any given asset into cash. Further, it is even the capability to purchase or trade any security leaving the asset’s price unaffected.
Overall, the liquid assets are of utmost importance to any individual or a company as it becomes extremely handy while making emergency debt repayments, purchasing equipment, hiring labor, payment of taxes, and several others. Therefore, any company or an individual willing to start a business or invest strategically needs immediate cash which is only possible if the entity has readily available cash or such securities that would fetch cash upon easy liquidation.
This has been a guide to what are Liquid Assets? Here we see the list of liquid assets along with practical liquid assets examples. Also, we discuss its the differences with current assets. You may have a look at these articles below to learn more about Accounting –
- Liquidity vs Solvency
- Current Ratio vs Quick Ratio | Top Differences | Which is better?
- Learn Basic Accounting in Less than 1 Hour!
- Conservatism Principle of Accounting