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Chapter 3: Q. 12 (page 111)

Explain the concept of liquidity.

Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

Short Answer

Expert verified

Cash in hand

A saving account at a local bank

The inventory of merchandiser

A one year bond

Ordinary shares

Land

Step by step solution

01

What is liquidity ? 

Liquidity refers to the ease with which assets may be converted into cash and their equivalents.

02

Explanation

The order of liquidity on the accounting records is the order in which assets are shown in relation to the time it would take to transform them into cash. As a result, cash usually comes first, followed by treasury stock, accounts receivable, inventories, and capital equipment.

In order of liquidity, assets can be organized as:

  1. Cash in hand
  2. A saving account at a local bank
  3. The inventory of merchandiser
  4. A one year bond
  5. Ordinary shares
  6. Land

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler鈥檚 checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of M1 from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results.

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b. Why are the growth rates of M1 and M2 so different? Explain.


2019202020212022
Currency880895900906
Money market mutual fund shares680685683692
Saving account deposits5,5005,7805,9686,105
Money market deposit accounts1,2141,2451,2741,329
Demand and checkable deposits1,000972980993
Small denomination time deposits8408711,1331,576
Traveler's check5543
3-month treasury bills1,9862,3742,4362,502

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