Liquid asset definition
/What is a Liquid Asset?
A liquid asset is any asset that is readily convertible into cash within a short period of time, and which suffers no loss in value as a result of the conversion. Convertibility is assisted by the presence of a large market in which there are many participants, and in which it is easy to transfer ownership from the buyer to the seller. Many organizations want to have a clear understanding of their liquid assets, to see if they can pay for their short-term obligations as they come due.
Examples of Liquid Assets
There are several classifications of assets that can be considered liquid assets. They include the following:
Cash. This includes all currencies, except those that are not readily convertible into the currency you need.
Marketable securities. To qualify as liquid assets, there should be a ready market for these securities.
Accounts receivable. This does not include non-trade receivables (such as amounts owed by employees), since it is problematic whether they will be paid on time.
Life insurance policies with cash surrender values
Precious metals. There is a ready market for most precious metals, so they are usually considered liquid assets.
Is Inventory a Liquid Asset?
In many cases, inventory is not considered a liquid asset, because it may require a significant amount of time to find a buyer. Also, when a business is in a rush to sell its assets, potential buyers may demand a discount before they will accept delivery. In addition, the inventory of many businesses contains a significant amount of obsolete inventory, which can only be sold off at a deep discount (if at all).
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How to Evaluate Liquid Assets
A business that has a large proportion of liquid assets on its balance sheet is better able to pay for its obligations in a timely manner, and so is considered a good credit risk. A lender is more likely to loan funds to an entity with liquid assets, since these assets can be used as collateral on a loan.
Presentation of Liquid Assets
Because liquid assets can be converted into cash on short notice, they are always presented as current assets on an organization’s balance sheet.