Question

- What does the financial term ‘liquidity’ mean in the accounting sense of the term? What other financial term is typically used alongside of it? How is it defined? Caution: do not use an accounting textbook’s definition of these terms.

- Discuss the two factors causing many if not most American corporations to be illiquid and possibly insolvent today?

Answer 1

What does the financial term ‘liquidity’ mean in the accounting sense of the term? What other financial term is typically used alongside of it? How is it defined?

Liquidity is the ability of a business to meet its shorterm obligations without the use of external financing. Liquidity is mainly measured for working capital needs, and the ability to run daily operations of business. A company's normal operations does not run on credit (direct wages, small procurements, utility bills etc..), So it is very important for the company to be liquid. Going concern and solvency are some if the financial terms used along side with liquidity.

Discuss the two factors causing many if not most American corporations to be illiquid and possibly insolvent today?

• Collection of accounts receivables - Debtors are the primary reason for tie up of company's money. Fr modern cooperation’s, it is impossible to lure customers without proper credit policy, so accounts receivable management and collection process are very important and any inefficiency in this factor makes the company illiquid and may possibly cause insolvency,

• Inventory - The most core opration of any copoeration is to sell inventory, the amount tied up in inventory is also as important as accounts receivables, if the coperation is not able to sell it on time and realise cash, the liquidity of the company will be severly effected, and can cause insolvency.