- Accounting liquidity
Accounting liquidity (liquidity) is a measure of the ability of a
debtorto pay their debts as and when they fall due. It is usually expressed as a ratioor a percentageof current liabilities.
For a corporation with a published
balance sheetthere are various ratios used to calculate a measure of liquidity. These include the following:
current ratio, which is the simplest measure and is calculated by dividing the total current assets by the total current liabilities. A value of over * the quick ratio- calculated by deducting inventories and prepayments from current assets and then dividing by current liabilities - gives a measure of the ability to meet current liabilities from assets that can be readily sold. A better way for a trading corporation to meet liabilities is from cash flows, rather than through asset sales, so;
* the operating cash flow ratio can be calculated by dividing the operating
cash flowby current liabilities. This indicates the ability to service current debt from current income, rather than through asset sales.
Understanding the ratios
For different industries and differing legal systems the use of differing ratios and results would be appropriate. For example, in a country with a legal system that gives a slow or uncertain result a higher level of liquidity would be appropriate to cover the uncertainty related to the valuation of assets. A
manufacturerwith stable cash flows may find a lower quick ratio appropriate than an Internet-based start up corporation.
Liquidity in banking
Liquidity is a prime concern in a
bankingenvironment and a shortage of liquidity has often been a trigger for bankfailures. Holding assetsin a highly liquid form tends to reduce the incomefrom that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of their depositors risks experiencing a bank run. The result is that most banks now try to forecasttheir liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators also view liquidity as a major concern.
Wikimedia Foundation. 2010.
Look at other dictionaries:
Accounting liquidity — The ease and quickness with which assets can be converted to cash. The New York Times Financial Glossary … Financial and business terms
accounting liquidity — The ease and quickness with which assets can be converted to cash. Bloomberg Financial Dictionary … Financial and business terms
liquidity — A market which allows quick and efficient entry or exit at a price close to the last traded price. The ability to liquidate or establish a position quickly is due to a large number of traders willing to buy and sell. The CENTER ONLINE Futures… … Financial and business terms
Liquidity — A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease. The New York Times Financial Glossary * *… … Financial and business terms
accounting — I (New American Roget s College Thesaurus) Keeping of financial records Nouns 1. (act of accounting) accounting, accountance, accountancy, bookkeeping, audit, calculation (See numeration), commercial or business arithmetic; cost or managerial… … English dictionary for students
accounting — /euh kown ting/, n. 1. the theory and system of setting up, maintaining, and auditing the books of a firm; art of analyzing the financial position and operating results of a business house from a study of its sales, purchases, overhead, etc.… … Universalium
liquidity ratio — a comparison of two accounts in a Balance Sheet, current assets divided by current liabilities. Glossary of Business Terms * * * liquidity ratio liquidity ratio ➔ ratio * * * liquidity ratio UK US noun [C] ► ACCOUNTING the value of a company s… … Financial and business terms
Market liquidity — Liquidity redirects here. For the accounting term, see Accounting liquidity. In business, economics or investment, market liquidity is an asset s ability to be sold without causing a significant movement in the price and with minimum loss of… … Wikipedia
immediate liquidity level — (Accounting) index of cash and the cash value of a business compared to its current debts (used to assess the financial stability for the short term) … English contemporary dictionary
Mark-to-market accounting — Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts … Wikipedia