Explore BrainMass

Liquidity Importance in Analysis of Financial Statements

1. What is an example of liquidity's importance in analysis of financial statements? Explain its importance from the viewpoint of more than one type of user.

2. Working capital equals current assets less current liabilities. Give an example of factors impairing the usefulness of working capital as an analysis measure.

3. Are fixed assets potentially includable in current assets? Explain. If your answer is yes, describe situations where inclusion is possible.

4. Describe the process and purpose through which Moody's Corporation/Moody's Investors Service conducts financial research and analysis on commercial and government entities.

Solution Preview

1. Liquidity measures an organization's ability to pay its short term obligations as they come due. This indicator is very important for suppliers as an assessment tool on whether they can collect what is due them at the end of the credit term. This is also important for the company's employees as liquidity tells whether it has enough money to pay the company's payroll. The company's liquidity is also important to other providers of capital such as banks especially those which the company has an existing credit line. If the liquidity of the company is very low, then it might mean an extension of the credit lines amount.

2. Working capital, by ...

Solution Summary

This response defines various accounting terms.