What are Liquid Assets?
Liquid Assets are the assets of the business which can be converted into cash within a short span of time and includes the assets such as cash, marketable securities, and money market instruments and they are shown on the asset side of the balance sheet of the company.
In simple terms, these assets can be transformed into cash rapidly, with a 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 vast amount of money is being exchanged every day and thus, making it extremely difficult for a person to affect 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, several other assets 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 –
Example # 1
- The stock market is believed to be the perfect example of any liquid market as there exist vast numbers of sellers and buyers, coupled with several other stocks being examples of liquid assets.
- Considering such an asset’s significant trading volume, some equitable securities might fast be transformed into cash. Such types of cases mainly exist for stocks having significant share volume and huge market capitalization.
- Since securities can be quickly sold through electronic markets at complete market prices while in demand, equitable stocks under correct circumstances are liquid;
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 it 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.
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 arises.
- Usually, investments can simply be sold, depending upon the investment.
Current Assets vs. 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 include the above list and, also, have inventories and prepaid expenses.
Consolidated Liquid Assets
Consolidated liquid assets are securities and cash that can readily be converted into cash, less current liabilities. Its 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.
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.
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Why are Liquid Assets 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 convenient 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.
Liquid Assets Video
This article has been a guide to what are Liquid Assets and its meaning. Here we provide a complete list of liquid assets and how it is different from current assets. You may have a look at these articles below to learn more about Accounting –