If current assets have increased more than current liabilities, what happened to liquidity?

If current assets have increased more than current liabilities, what happened to liquidity?

• A. Liquidity has increased
• B. Liquidity has decreased
• C. Liquidity is unchanged
• D. Liquidity is unstable

Answer: (A)

Liquidity is the ability to pay short-term bills with assets that can be turned into cash quickly. When current assets increase more than current liabilities, the cushion between what the company owns and what it owes grows, improving liquidity. This shows up as higher working capital (current assets minus current liabilities) and often a higher current ratio (current assets divided by current liabilities). For example, moving from current assets of 100 and current liabilities of 60 to current assets of 120 and current liabilities of 65 increases working capital from 40 to 55 and raises the current ratio, indicating more readily available funds to cover short-term obligations. So, liquidity has increased.

Liquidity is the ability to pay short-term bills with assets that can be turned into cash quickly. When current assets increase more than current liabilities, the cushion between what the company owns and what it owes grows, improving liquidity. This shows up as higher working capital (current assets minus current liabilities) and often a higher current ratio (current assets divided by current liabilities). For example, moving from current assets of 100 and current liabilities of 60 to current assets of 120 and current liabilities of 65 increases working capital from 40 to 55 and raises the current ratio, indicating more readily available funds to cover short-term obligations. So, liquidity has increased.