CASH AND LIQUIDITY MANAGEMENTLiquidity is the amount of time required to convert an asset into cash or pay a liability. For noncurrent assets, liquidity generally refers to marketability. Cash is a highly liquid asset. Accounts receivable and inventory are somewhat less liquid. Property, plant, and equipment would ordinarily be very nonliquid assets. Liquidity is important in evaluating the timing of cash inflows and outflows. The liquidity of an enterprise is a major indicator of its ability to meet its debts when they mature.Liquidity ratios are often used to measure a firm's liquidity. These ratios typically relate to the enterprise's working capital—its current assets and current liabilities. Current assets include cash, short-term marketable securities, receivables, inventories, and prepaid items. Current liabilities include such items as accounts payable, taxes, interest payable, and other such short-term payables. Major liquidity ratios include the current ratio and acid-test ratio computed as follows:
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