The consolidated liquid assets are cash and such securities that can be readily subjected to cash conversion without the current liabilities. The formula is mentioned below.
The examples of a liquid asset would comprise both cash and investments.
Legal tender by way of cash is easily accessible and highly disposable. It can be utilised immediately for paying any existing liabilities. Cash available, whether at a bank or in hand, is considered to be liquid as it may be immediately used without any associated formalities.
Specific investments can also be considered as liquid as they can be liquidated readily. In case of any financial urgency, it may be converted to cash quickly. Investments comprise a large number of instruments such as mutual funds, bonds, money market instruments and stocks, among others.
Among a host of liquid assets, few have been mentioned below.
Cash at Bank
Cash at a bank pertains to the sum of the amount that is deposited in a financial institution. It is considered to be a current asset in a highly liquid form.
Cash in Hand
It usually refers to the total accessible cash of an organisation. In the context of a company, cash in hand helps in the inference of the number of days for which an organisation can carry on with paying its operating expenses with the available cash.
The short-term investment securities are known as cash equivalents with maturity periods to be usually around 90 days or less. Examples of cash equivalent include Treasury bills, legal tender, cheques that are received but not deposited etc.
A government may issue debt security to raise funds. The holder of a government bond earns a fixed amount of interest against the amount loaned to a governmental body.
A promissory note is a financial instrument that shows the written promise by an issuer to pay a definite sum of money to a payee on a determined future date. It creates a legal obligation on the issuer to pay such loan.
Accrued income is such an amount of money that has already been earned but yet not received. Interest earned on investment that has not been received is an example of accrued income.
It is an investment in company shares representing ownership corresponding to the volume of stocks owned. Through an increase in the value of stocks, investors can earn capital gains by selling such shares.
Account receivables pertain to such proceeds or payment that the customers of a company will have to pay for purchasing services or goods on credit.
The importance of liquid assets for companies arise from the fact that liquidity happens to be a key component of financial health, based on which investment decisions are undertaken. It becomes crucial in the instances of emergency debt payment, and payment of taxes or wages etc.
The analysis of liquidity is done by a number of ratios. Liquidity ratio is significant as it indicates whether a business holds the capacity to pay off its short-term debts. The two significant liquidity ratios are –
This ratio measures the ability of a company to settle its short-term obligations within a particular financial year.
It is the extent to which a company may settle its short-term financial liabilities without securing additional financing or selling off its inventory. It is also known as the acid-test ratio.
Test Your Knowledge –
1. Which of the following do you think is the most liquid asset?
2. Which of these below-mentioned options can be considered as a liquid asset?
Cash in hand
All of the above
3. Investments can never be considered to be liquid?
Only when sanctioned by the government
(d) All of the above
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1. What are Liquid Assets?
The asset that is subject to easy conversion to cash, or the cash itself held in hand is called a liquid asset. Liquid assets may be sold with scant or perhaps no alteration in its value.
Apart from cash, examples of liquid assets include marketable securities and money market instruments, among others.
2. What is the Total Liquid Asset?
A total liquid asset is a variant of liquid asset. There is a specific formula by which total liquid asset is calculated. Any asset that can be converted to cash quickly is added to the account receivable funds along with the cash in hand. This entire corpus is then divided by current liabilities. The total liquid asset amounts to the ratio of liquid assets with current liabilities.
3. Are Mutual Funds Considered Liquid Assets?
The primary attribute of liquid assets is its easy convertibility to cash. Cash equivalents like specific mutual funds can also be considered to be a liquid asset due to its short-term maturity periods and can be converted to cash easily. The investors to mutual funds can sell their holding at any point of time and receive the due fund within stipulated days.