Which of the following is the most liquid asset?

• A. Cash
• B. Accounts Receivable
• C. Inventory
• D. Prepaid Expenses

Answer: (A)

Verified step by step guidance

1. Understand the concept of liquidity: Liquidity refers to how quickly and easily an asset can be converted into cash without losing value. The most liquid asset is cash itself, as it is already in its most usable form.
2. Analyze each option: Cash is the most liquid asset because it requires no conversion. Accounts Receivable represents money owed by customers, which requires collection efforts to convert into cash. Inventory requires selling and possibly additional processing to turn into cash. Prepaid Expenses are payments made in advance for goods or services, which cannot be directly converted into cash.
3. Compare the options: Cash is immediately available for use, while the other assets require additional steps or processes to become cash. This makes cash the most liquid asset.
4. Apply the definition of liquidity: Based on the definition, the asset that can be used immediately without any conversion process is the most liquid. Cash fits this criterion perfectly.
5. Conclude: Cash is the most liquid asset among the options provided because it is already in its usable form and does not require any further action to be utilized.