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What is the difference between solvency and liquidity?

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Question added by Abu Bakar Ashfaq , Senior Consultant , PricewaterhouseCoopers Middle East
Date Posted: 2016/02/25
Fathi Matbaq
by Fathi Matbaq , Senior Purchasing Officer , Alghanim Industries

Liquidity is a firm ability to meet short-term obligations. An important liquidity ration is the current ratio; current assets available to satisfy current liability. Also, quick ratio ( acid-test ratio) uses only the most liquid current assets; cash and cash equivalent, short term investment and account receivables. Solvency is a firm ability to meet long-term obligations by assessing long-term financing structure and credit risk. It uses total debt to equity ratio, total debt ratio, long-term debt to equity, ... etc.

Frank Mwansa
by Frank Mwansa , ACCOUNTING LECTURER , FREELANCER

Solvency is the ability of an entity to meet its long-term financial obligations. Solvency is  is important  for the company to stay in business, but also the company needs liquidity to thrive.

Liquidity is the entity's company's ability to meet its short term obligations. It is the amount of  cash a company can lay its hands on to pay its short term debts. e.g cash short-term investments are examples of liquidity.

 

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