LIQUIDITY

Liquidity reflects the ability of a company to meet its short-term obligations using those assets that are most readily converted into cash.

Assets that may be converted into cash in a short period of time are referred to as liquid assets; they are listed in financial statements as current assets. We often refer to current assets as working capital, because they represent the resources needed for the day-to-day operations of the company’s long-term capital investments.

Current assets are used to satisfy short-term obligations, or current liabilities. The amount by which current assets exceed current liabilities is referred to as the net working capital.