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

Liquidity means that the company is having enough cash in its books and it is having enough current assets which can be quickly liquidated in to cash in order to discharge its liability so liquidity will mean that the company will be having enough cash and cash equivalents in its books to manage short term as well as long term debt repayment liability.

Financial term used alongside liquidity will be management and liquidity should be properly managed in order to have a proper sustainability in the longer period of time

liquidity management is the management of liquidity of the company in order to deal with its short term as well as long term debt repayment schedule so that the company can have enough cash in its books of accounts and it can have a a lesser default risk associated with its payment of creditors.

Two factors which are causing most of the American corporates to be illiquid and possibly insolvent would be that companies are missmatching their assets with liabilities and they are trying to fund long term capital with short term debt liabilities and they are engaging into Capital expenditures to a large extent so that they are not able to generate enough amount of cash flows in the short run in order to discharge the debt and it is leading them into a liquidity squeeze and they are not able to repay their money and they are forced into insolvency after carrying a high amount of financial distress cost.