Question

Why inventory is excluded from liquid assets?

Answer 1

Inventory is excluded from liquid assets because inventory is less liquid than cash, receivables, or marketable securities. If slow-moving or unsellable, inventory may take longer to turn into cash than these assets. Inventory frequently needs to be reduced or sold slowly, making it unsuitable for immediate financial requirements. To better assess a company's ability to cover short-term liabilities, the liquid ratio (quick ratio) removes inventory and focuses on readily available assets.