Q:

What is the difference between solvency and liquidity?

A:

Quick Answer

Liquidity is the ability of a company or country to meet its near-term cash flow requirements. Solvency is the ability for a company or country to meet its long-term financial obligations.

 Know More

Full Answer

Assets are what a company can use to pay for goods and services. Assets may be cash, inventory, property or other financial instruments. Companies use assets to pay for its liabilities.

When a company’s assets are greater than its liabilities it is solvent. In other words, if all of its liabilities were due immediately, it would have enough assets to pay them off.

However, a liquidity issue arises if a company does not have enough cash to pay for its immediate debts. A company that is solvent can typically acquire cash to resolve this liquidity issue by getting a loan against assets or issuing stock.

A company can have liquidity and be insolvent. This occurs if a company has enough cash to meet its near-term debts, but all of its assets are less than the total amount of money owed. A company can sometimes resolve insolvency, particularly if it has liquidity. To do so the company reduces expenses to increase cash flow to eventually have more assets than debts, or the company reduces debts, which may include negotiating with the debt holders to reduce the total amount owed.

Countries are more complex, especially as many can print their own money to address liquidity issues.

Learn more about Financial Calculations

Related Questions

  • Q:

    What is a profit sharing plan?

    A:

    A profit sharing plan gives employees a percentage of the profits the company earns each year. These funds are put into an investment account for the employees.

    Full Answer >
  • Q:

    What are bid sheets for commercial cleaning?

    A:

    Commercial cleaning bid sheets contain proposed cleaning services a company wishes to offer and rates for performing the specified cleaning work. The bid sheet outlines in detail what rooms and items are to be cleaned. For example, a commercial cleaning company bidding to clean a residential kitchen would include rate estimates for cleaning items such as the refrigerator, microwave, stove, sink, cabinets, countertops, tables, floors, walls and kitchenware.

    Full Answer >
  • Q:

    What are efficiency ratios?

    A:

    Efficiency ratios are various types of ratios that determine how well a company uses its assets and resources to make a profit. Different types of efficiency ratios include the accounts receivable and accounts payable turnover ratios, the inventory turnover ratio and the average collection periods.

    Full Answer >
  • Q:

    How can you calculate earnings per share?

    A:

    To calculate earnings per share, evaluate the total income generated by the company and the number of shares issued. Subtract dividend paid from net income, and divide by the average number of outstanding shares.

    Full Answer >

Explore