Answered Essay: Can a business be liquid but not solvent? Solvent but not liquid? How?

Can a business be liquid but not solvent? Solvent but not liquid? How?

Please explain in terms of a farm or ranch business thank you!!

Expert Answer

 

ANSWER:

Solvency refers to the measure of a company’s ability to cover their liabilities with their assets, thus a solvent company have the ability to pay all of its debts. Liquidity is companies’ ability to turn its assets into cash, and often for paying off its debts.

Yes, a business can be solvent but not liquid. This can occur when most of the total asset value is in assets with the least liquidity such as land and buildings and many of the liabilities are current. Because the farm and ranch businesses usually have a big proportion of their assets in land, buildings and other noncurrent assets, the situation is common.

By Concepts, a business can be liquid but not solvent. The business will require a huge sum of current asset value relative to its current liabilities and noncurrent liabilities considerably higher than noncurrent assets. The latter might happen, for instance, given a sharp decline in the market value of noncurrent assets such as land and buildings. But because the current portion of any noncurrent debt is included as a current liability, thus would be difficult to find a farm or ranch business which is liquid but not solvent

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