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Subject 2. Liquidity PDF Download
Liquidity refers to the ability of a company to satisfy its short-term obligations using assets that can be readily converted to cash. Liquidity depends on both the type of asset and the speed at which it can be converted to cash.
Even though long-term assets may also be converted to cash to improve liquidity, it has other costs for a company, for example, it may impair a company's financial strength.
There are two sources of liquidity. The main difference between the two sources is whether or not the company's normal operations will be affected.
Drags and Pulls on Liquidity
The timing of cash receipts and disbursements can significantly affect a company's liquidity position.
A drag on liquidity exists when cash inflows lag.
A pull on liquidity is generated when cash outflows happen too quickly or when a company's access to commercial or financial credit is limited.
Liquidity Ratios
Liquidity ratios measure the ability of a company to meet future short-term financial obligations from current assets and, more importantly, cash flows. Each of the following ratios takes a slightly different view of cash or near-cash items.
User Contributed Comments 3
User | Comment |
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myron | Drags are delay and slowing in cash inflows While pulls are accelerating cash outflows. Think of pull as something sucking out the cash from a corps. Link up the concept to a vacuum cleaner lol. |
zamian | Liquidity management refers to how a company balances its short-term liabilities with short-term assets. |
zamian | Drags has R in it .. receipts/receivables Pulls have L in it .. liabilities or outflows. |
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