Liquidity measurement is an integral part of financial statement analysis. These are various measures to find or to ascertain the firm’s ability to meet the short term expenses or liabilities and convertibility to liquid assets into cash on requirement. Copy the link given below and paste it in new browser window to get more information on Liquidity Measurements:- www.transtutors.com/homework-help/finance/liquidity-measurements.aspx

2.  The degree to which an asset can be quickly
bought or sold in the market without
affecting its value.

3. Cash and other assets that can be easily
converted to or expected to convert into
cash within a year. Current assets include:
 cash and cash equivalents
 short-term investments
 account receivables
 inventory

4. Debts or the obligations that must be fulfilled
within a period of 1 year or less. Current
liabilities include:
 accounts payable
 short-term debt
 current interest payments for long-term
debts
 salaries
 taxes

5.  Working capital is the amount of capital
used to meet the day to day expenses i.e.
operating expenses (part of current
liabilities). The net amount after deducting
current liabilities from current assets is
known as net working capital.

6.  Liquidity index is used as a measure to
calculate the number of days needed to
convert trade receivables and inventories
into cash. It also measures the firm’s ability
to meet the cash requirements.
 Liquidity index formula:
{(Trade receivables x Days to liquidate) +
(Inventory x Days to liquidate)}/
Trade Receivables + Inventory

7.  Liquidity risk is uncertain amount (risk) that
crops up due to low marketability of an asset
or an investment that cannot be traded
quickly enough to minimize loss or prevent
loss.

8.  Formula:
Current Assets/ Current Liabilities
 Ideal Ratio: 2:1

9.  Formula:
(current assets-inventories)/current liabilities
 Ideal ratio: 1:1

10.  Formula:
(cash+ cash equivalents+ invested
funds)/current liabilities
 It is also known as cash asset ratio.

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