The Elapsed Time Before An Asset Becomes Cash Or A Liability

917 WordsMar 21, 20174 Pages
The elapsed time before an asset becomes cash or a liability is settled is called liquidity (Spiceland, 115). A liquid company is one which can quickly generate cash from its assets and pay its short-term liabilities on time (Spiceland, 365) (Libby, 453). Current assets are positioned in order of decreasing liquidity on the balance sheet, and liabilities are listed in order of how quickly these debts are expected to be settled (Spiceland, 117) (Libby, 45). Cash and cash equivalents have the highest liquidity among assets on the balance sheets of companies (Spiceland, 117). It is important for companies to have cash available because most liabilities are settled using cash (Spiceland, 134). Cash equivalents are investments which will…show more content…
The acid-test ratio is calculated by dividing a company’s quick assets by its current liabilities (Libby, 660). This ratio excludes those more illiquid elements of current assets before measuring a company’s current assets against its current liabilities (Spiceland, 134) (Libby, 660). Lastly, the cash ratio is calculated by adding a company’s cash and cash equivalents, and dividing them by its current liabilities (Libby, 659). While it does not consider most current assets, the cash ratio reveals the amount of current liabilities which a company could settle using only available cash and investments which will become cash in the near future (Libby, 659). While these ratios are not completely informative in isolation, they provide a snapshot of the liquidity of companies and can be useful to creditors when used in conjunction with other measures of long-term profitability (Spiceland, 135). Companies receive loans from financial institutions called creditors (Libby, 231). Creditors lend money to companies for a specified period of time and receive interest in the future on their initial offerings (Hasan, Chapter One Lecture Notes). Creditors will provide companies with money as long as they believe that they will ultimately collect more cash than they provided to the company (Spiceland, 5). Creditors rely on financial reporting in order to make informed lending decisions (Spiceland, 132). Liquidity is one of the most important pieces of

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