Category: Dictionary

Liquid assets mean those assets which can be converted into cash immediately without much loss.

The above definition seems to define current assets. So what’s the difference between these two?

One has to abstract the amount of inventories and prepaid expenses from the total amount of current assets to arrive at required figure.

Formula for the calculation of Liquid Assets:

= Current assets – (Inventory + prepaid expenses)

Inventory and prepaid expenses are excluded from the scope of liquid assets because:

• Inventory can not be converted immediately into cash as and when required &
• Prepaid expenses cannot be converted into cash at all.

Application of the formula:

Let’s suppose that XYZ Ltd has following figures on its balance sheet under the head ‘Current assets’

Using the formula and figures, we can calculate the total current assets as follows:

Total current assets	1,15,000
Total amount of ‘Inventory’ and ‘Prepaid expenses’	22,000 + 5,000 = 27,000

Liquid assets = 1,15,000 – 27,000 = 88,000.

Liquid liabilities are debt obligations which a firm has to pay within a year.

These liabilities are calculated by deducting the amount of bank overdraft and cash credit facilities (these must be excluded only if they become a permanent mode of financing) from total amount of current liabilities.

Formula for the calculation of liquid liabilities:

Below formula can be extracted from the given definition:

Why these liabilities are calculated?

These liabilities are calculated to gauge the firm’s ability to meet its short term liabilities. The calculated figure of these liabilities is used in the calculation of ‘Acid test ratio’ or ‘Quick ratio’. This ratio directly indicates the ability of a firm to meet its short term debt obligations.

Liquidity refers to the ability of a company to convert its assets into cash within a very short period of time. That is why those current assets which can be converted into cash are called liquid assets.

For an investor liquidity means how quickly securities can be bought and sold in the market without losing a much value of it.

Market capitalization refers to a company’s total capital consisting of its total outstanding shares. It is calculated by multiplying total number of outstanding shares by market price of each share.

It is also known as ‘market cap’ of a company.

Formula for calculation of market capitalization:

From the above given definition, following formula can be derived:

Example:

Lets suppose, 5 years ago a company named XYZ Limited issued 100,000 equity shares of INR 10 each. At present, the market value of each share is INR 15.

Thus, the market cap of XYZ Limited is = 100,000 × 15 = INR 1,500,000.

This figure is used to measure the total worth of a company.

The stated value of an asset or a security is called nominal value. Nominal value of a security is the par value at which it is issued. That is why it is also known as par value.