 Hello in this lecture we will define liquidity according to fundamental accounting principles while 22nd edition the definition of liquidity is availability of resources to meet short term cash requirements. Let's drill down on this term cash requirements what we're looking to in terms of cash is to pay off for the short term needs of the organization what are we going to need to keep the organization running in the next time period the next week month and year and what do we need in order to pay off our current obligations the debt that we owe in terms of possibly accounts payable and in terms of loans payable that's going to be the idea of liquidity do we have liquid enough assets and enough assets in order to pay for those types of obligations a couple calculations that would be used in order to measure liquidity current are the current ratio that would be comparing the current assets to the current liabilities current liabilities are what we're going to owe within a year that's an arbitrary time frame a year but it's a good time frame that's relatively short time frame as compared to current assets those being more liquid assets assets that are more readily closer to cash or assets that will be used or consumed in a relatively short period of time so what we're saying here is how many times can we pay off the liability with our current assets that will give us a measure of our liquidity can we pay off our current debts the ones due within a year with just our current assets another more stringent type of ratio that can be used for the measure of liquidity would be the quick ratio which would be the quick assets divided by those same current liabilities so the question here of course is what's the difference between quick assets and current assets current assets are usually going to be listed right on the balance sheet you'll see them there's the current assets as opposed to the property plants and equipment the more long-term assets we can't usually pay off our current liabilities with property property plants and equipment but the quick assets are even going to be more stringent we're not going to have a subtotal on the balance sheet of quick assets but what we're really saying is it's going to be the current assets and we're going to take a few things out including the inventory so generally inventory is something included in current assets we're going to go ahead and take that out of quick assets and say hey what if we didn't even sell any of the inventory on the books as an asset then let's take a look at our current liability this liability is due within a year and divide that divide quick assets by that or divide current liabilities into the quick assets and see how many times over we can pay the current liabilities with only those quick assets those very liquid assets