Which one of the following statements related to liquidity is correct?
A)Liquid assets tend to earn a high rate of return.
B)Liquid assets are valuable to a firm.
C)Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
D)Inventory is more liquid than accounts receivable because inventory is tangible.
E)Any asset that can be sold within the next year is considered liquid.

Question

Quizplus · Accepted Answer

Liquidity refers to the ability of an asset to be converted into cash quickly without significant loss of value. Liquid assets, therefore, are valuable to a firm because they can be easily converted into cash in case of need. They also provide a sense of security to creditors and investors because they can be easily converted into cash to meet any obligations. So, option B is correct. Option A is incorrect because there is no necessary relationship between liquidity and rate of return. Option C is incorrect because the speed at which an asset can be sold is not the only factor determining liquidity. Option D is incorrect because accounts receivable are generally considered more liquid than inventory since accounts receivable are a claim against a customer to pay, while inventory is a physical good that may take time to sell. Option E is incorrect because there is no specific time period for an asset to be considered liquid.

Which One of the Following Statements Related to Liquidity Is