Liquid asset definition
/What is a Liquid Asset?
A liquid asset is any asset that is readily convertible into cash within a short period of time, and which suffers no loss in value as a result of the conversion. Convertibility is assisted by the presence of a large market in which there are many participants, and in which it is easy to transfer ownership from the buyer to the seller. Examples of liquid assets are cash, marketable securities, accounts receivable, life insurance policies with cash surrender values, and precious metals.
Is Inventory a Liquid Asset?
In many cases, inventory is not considered a liquid asset, because it may require a significant amount of time to find a buyer. Also, when a business is in a rush to sell its assets, potential buyers may demand a discount before they will accept delivery. In addition, the inventory of many businesses contains a significant amount of obsolete inventory, which can only be sold off at a deep discount (if at all).
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How to Evaluate Liquid Assets
A business that has a large proportion of liquid assets on its balance sheet is better able to pay for its obligations in a timely manner, and so is considered a good credit risk. A lender is more likely to loan funds to an entity with liquid assets, since these assets can be used as collateral on a loan.
Presentation of Liquid Assets
Because liquid assets can be converted into cash on short notice, they are always presented as current assets on an organization’s balance sheet.