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1. What does a firm’s liquidity measure? Why do investors analyze liquidity? How does liquidity relate...

1. What does a firm’s liquidity measure? Why do investors analyze liquidity? How does liquidity relate to risk?

2. What does a firm’s solvency measure? Why is a high level of debt relative to equity considered riskier?

3. How do firms report assets on the balance sheet under IFRS?

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1 Liquidity means the available financial resources with the company to meet its financial obligations as and when they become due. Firms liquidity measures the ability of the firm to pay off its short term liabilities out of bank balance or current assets that can be easily converted into cash. Liquidity ratio should be fairly good. If it is poor it indicates either the firm is in financial problem or the firm is poorly managed. If it is too high, then also there is loss of opportunity cost Hence liquidity should be fairly enough to meet the short term debts as and when they occur Investors check the fundamentals of the company before investing and while their funds are there in the company. Liquidity is an important aspect of the firms fundamentals that the investors analyse. It tells them the ability of the firm to convert current assets into cash to repay its short term obligations or other obligations as and when required or in case of some emergency situations or in regular course of business. ncorrect liquidity warns the investors of the poor management of the firm. If there is consistently problem in payment of the firms short term debts, then there is higher risk of the firm becoming bankrupt within a short period of time and not able to continue in the long run. Hence the investors analyze liquidity to measure the risk relatively faced by the firm Liquidity is a measure of the firms financial health Low I q dity or high quid both are not good ? he es qui the e is risk that the firm might not be able to discharge its short term obligations on time which might lead to financial loss. Similarly if there is high liquidity, then there is risk that the firm does not make optimum utilization of its resources leading to loss of higher returns that it would have earned had it invested the funds in high returns yielding options. hus liquidity is a financial risk wherein there are chances of financial loss in the event of mismanagement of liquidity There is a risk that the firm might not have enough cash to pay its creditors on time, there is a risk that the firm might not be able to sell illiquid assets in the market at the fair value, there is a risk that the firm might not be able to sell illiquid assets due to lack of buyers in the market etc.

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