Question

Explain the concept of liquidity.

Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

Short answer

Cash in hand

A saving account at a local bank

The inventory of merchandiser

A one year bond

Ordinary shares

Land

Step-by-step solution

What is liquidity ? 

Liquidity refers to the ease with which assets may be converted into cash and their equivalents.

Explanation

The order of liquidity on the accounting records is the order in which assets are shown in relation to the time it would take to transform them into cash. As a result, cash usually comes first, followed by treasury stock, accounts receivable, inventories, and capital equipment.

In order of liquidity, assets can be organized as:

1. Cash in hand
2. A saving account at a local bank
3. The inventory of merchandiser
4. A one year bond
5. Ordinary shares
6. Land