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Analysis of balance sheet liquidity

The liquidity of the balance is estimated on the basis of form No. 1 of the accounting statements “Balance sheet”.Indicators for analyzing balance sheet liquidity.

In order to analyze the balance sheet liquidity, it is necessary to divide the indicators of this form of financial statements into the following groups:

The most liquid assets (A1) – the amount of cash and financial investments.
Quickly sold assets (A2) – current assets, short-term receivables.
Slow-moving assets (A3) – stocks, long-term receivables, VAT on acquired values.
Hard-to-sell assets (A4) – non-current assets.
The most urgent liabilities (P1) – short-term liabilities.
Short-term liabilities (P2) – short-term loans and borrowings.
Long-term liabilities (P3) – long-term loans and borrowings.
Permanent liabilities (P4) – equity, deferred income and reserves for future expenses.
Thus, the indicators of group A are taken from the asset balance, and the indicators of group P are taken from its liabilities, as a result, the equality between the sum of indicators of group A and the sum of indicators of group P should be observed.

The balance sheet is liquid if the indicators A1, A2, A3 are greater than or equal, respectively, to the indicators P1, P2, P3, and the indicator A4 is less than or equal to the indicator P4.

To analyze the balance sheet liquidity on the basis of the above indicators, you can use an analytical table in which the necessary indicators will be grouped, and the value of inequalities will be estimated.

Analysis of the liquidity of the balance sheet is better to evaluate in dynamics, using financial statements for several periods. In this case, you can select the period in which the balance sheet was the most liquid, as well as to assess the reasons for which liquidity decreases.

Calculation of liquidity ratios
In order to continue the analysis of balance sheet liquidity, it is necessary to calculate the following ratios:

The absolute liquidity ratio is the ratio of the most liquid assets to short-term liabilities.
The quick ratio is the ratio of cash, short-term investments and short-term receivables to short-term liabilities.
The current liquidity ratio is the ratio of the total amount of liquid current assets to short-term liabilities.
Net current assets – the difference between the total amount of liquid current assets and short-term liabilities.
The absolute liquidity ratio shows how much of the short-term liabilities can be repaid immediately, if necessary. The normal value of the absolute liquidity ratio ranges from 0.2-0.3.

According to the example, which was considered earlier, the absolute liquidity ratio is 0.02 (1979/118407), which indicates a poor level of liquidity.

The quick ratio shows what part of current liabilities can be repaid both at the expense of cash and at the expense of expected receipts from buyers. Based on the above data, you can calculate the quick liquidity ratio, which is equal to 4.8. This means that only 4.8% of current liabilities can be repaid due to the available cash and expected income from customers, which is also not a good value.

The current liquidity ratio characterizes whether the company has sufficient funds to repay short-term liabilities. The structure of the balance sheet is recognized as satisfactory if the value of this indicator is greater than or equal to 2. If you calculate the current liquidity ratio from the given data, it will be equal to 4.9, which significantly exceeds the normal level of this indicator.

Net current assets characterize the overall financial stability of the enterprise. This indicator should be considered in dynamics over several periods in order to assess whether the enterprise has a tendency to increase the financial resources of the enterprise for expansion.

Based on the above, readers of MirSovetov can conclude that the analysis of balance sheet liquidity is an important process when planning business activities, as well as assessing the results obtained. The analysis of balance sheet liquidity shows how quickly the organization’s liabilities can be repaid from existing assets.

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