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Chapter 3: Q. 12 (page 111)

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

Expert verified

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

01

What is liquidity ? 

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

02

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

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Most popular questions from this chapter

Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.

a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a €100 note to pay for the goods.

b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.

c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.

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Suppose that the cost of a movie ticket is \(12, and a latte costs \)6. Why would the theater management say the cost of admission is $12 and not two lattes? Explain why it is more efficient to compare the value of commodities in monetary terms.

In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the “double coincidence of wants” problem, even if a prisoner does not smoke?
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