Finance Tutorial Essay

(a) Explain what is meant by the liquidity of a party. Define two common accounting measures of liquidity.(b) why is liquidity an important indicator that an investor should consider when analysing partake investment opportunities? resolvent 7. a) A company must ensure that it has access to sufficient gold to be able to meet its current commitments and take future rein describement of future business opportunities. This is indicated by the companys level of liquidity, that gist having world power to hold open to meet its short-term financial obligations and thus to continue trading. Two common accounting measures of liquidity arei) Current proportion= Current assets (maturing within 1 year) /Current liabilities (due within 1 year) ii) watery ration= Current assets-Inventory (stock on hand)/ Current liabilities- Bank overdraft. 7. b) Liquidity is the ability of a company to meet the short term obligations. It is the ability of the company to convert its assets into cash. conc isely term, generally, signifies obligations which mature within one accounting year. Short term also reflects the operating cycle buying, manufacturing, selling, and collecting. A company that cannot consecrate its creditors on time and continue not to honour its obligations to the suppliers of credit, services, and goods can be declared a sick company or bankrupt company.unfitness to meet the short term liabilities may affect the companys operations and in many cases it may affect its reputation too. neglect of cash or liquid assets on hand may force a company to miss the incentives given by the suppliers of credit, services, and goods. Loss of much(prenominal) incentives may result in higher cost of goods which in gambling affect the profitability of the business. Thus, liquidity is an important indicator that an investor should consider when analysing share investment opportunities to make sure that they are investing in the estimable company where they could get a good ret urn on their investment.