{"id":4114,"date":"2020-10-26T15:49:50","date_gmt":"2020-10-26T15:49:50","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4114"},"modified":"2020-11-15T19:23:55","modified_gmt":"2020-11-15T19:23:55","slug":"introduction-to-liquidity-measures","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/introduction-to-liquidity-measures\/","title":{"raw":"Introduction to Liquidity Measures","rendered":"Introduction to Liquidity Measures"},"content":{"raw":"<h2>What you will learn to do: Calculate ratios that indicate a company's short-term debt-paying ability<\/h2>\r\nLiquidity analysis looks at a company\u2019s available cash and its ability to quickly convert other current assets into cash to meet short-term operating needs such as paying expenses and debts as they become due. Cash is the most liquid asset; other current assets such as accounts receivable and inventory may also generate cash in the near future.\r\n\r\nCreditors and investors often use liquidity ratios to gauge how well a business is performing. Since creditors are primarily concerned with a company\u2019s ability to repay its debts, they want to see if there is enough cash and equivalents available to meet the current portions of debt.\r\n\r\n<img class=\"aligncenter wp-image-5258 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05042954\/ecommerce-2140604_1920-1024x448.jpg\" alt=\"Two hand sticking out from two laptop screens facing each other. One hand is holding a dollar bill, the other is holding a shopping bag.\" width=\"1024\" height=\"448\" \/>\r\n\r\nThe most common measures of liquidity are:\r\n<ul>\r\n \t<li>Working Capital<\/li>\r\n \t<li>Current Ratio<\/li>\r\n \t<li>Quick Ratio and Acid-Test Ratio<\/li>\r\n \t<li>Cash Turnover Ratio<\/li>\r\n<\/ul>\r\nWorking capital and the current and quick ratios evaluate a company\u2019s ability to pay its current liabilities.\r\n\r\nThe cash turnover ratio is an indicator of the number of times cash is turned over in an accounting period and is most relevant for companies that don\u2019t extend credit.","rendered":"<h2>What you will learn to do: Calculate ratios that indicate a company&#8217;s short-term debt-paying ability<\/h2>\n<p>Liquidity analysis looks at a company\u2019s available cash and its ability to quickly convert other current assets into cash to meet short-term operating needs such as paying expenses and debts as they become due. Cash is the most liquid asset; other current assets such as accounts receivable and inventory may also generate cash in the near future.<\/p>\n<p>Creditors and investors often use liquidity ratios to gauge how well a business is performing. Since creditors are primarily concerned with a company\u2019s ability to repay its debts, they want to see if there is enough cash and equivalents available to meet the current portions of debt.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5258 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/05042954\/ecommerce-2140604_1920-1024x448.jpg\" alt=\"Two hand sticking out from two laptop screens facing each other. One hand is holding a dollar bill, the other is holding a shopping bag.\" width=\"1024\" height=\"448\" \/><\/p>\n<p>The most common measures of liquidity are:<\/p>\n<ul>\n<li>Working Capital<\/li>\n<li>Current Ratio<\/li>\n<li>Quick Ratio and Acid-Test Ratio<\/li>\n<li>Cash Turnover Ratio<\/li>\n<\/ul>\n<p>Working capital and the current and quick ratios evaluate a company\u2019s ability to pay its current liabilities.<\/p>\n<p>The cash turnover ratio is an indicator of the number of times cash is turned over in an accounting period and is most relevant for companies that don\u2019t extend credit.<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4114\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Introduction to Liquidity Measures. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Financial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\">https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li><strong>Authored by<\/strong>: Mediamodifier. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/ecommerce-selling-online-2140604\/\">https:\/\/pixabay.com\/photos\/ecommerce-selling-online-2140604\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":5,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Introduction to Liquidity Measures\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Financial Accounting\",\"author\":\"Christine 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