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

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

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

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.

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

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.

Formula: Current Assets/ Current Liabilities

Ideal Ratio: 2:1

Formula:(current assets-inventories)/current

liabilities

Ideal ratio: 1:1

Formula:(cash+ cash equivalents+ invested

funds)/current liabilities

It is also known as cash asset ratio.

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