Which of the following types of receivables would be considered the most liquid?

• A. Notes receivable (due in 2 years)
• B. Accounts receivable
• C. Interest receivable
• D. Advances to employees

Answer: (B)

Verified step by step guidance

1. Understand the concept of liquidity: Liquidity refers to how quickly an asset can be converted into cash without significant loss of value. In the context of receivables, the most liquid receivable is the one that can be collected or converted into cash the fastest.
2. Analyze each type of receivable: Notes receivable (due in 2 years) is not highly liquid because it has a long-term maturity. Interest receivable depends on the timing of interest payments, which may not be immediate. Advances to employees are not liquid because they are essentially prepayments and may not be recoverable quickly.
3. Focus on accounts receivable: Accounts receivable represents amounts owed by customers for goods or services provided on credit. These are typically collected within a short period, such as 30 to 60 days, making them highly liquid.
4. Compare accounts receivable to other receivables: Since accounts receivable are expected to be collected in the shortest timeframe compared to the other options, they are considered the most liquid.
5. Conclude based on liquidity: Accounts receivable is the most liquid type of receivable among the options provided because it is closest to being converted into cash in the normal course of business operations.