ORDER OF LIQUIDITY

The order of liquidity is the presentation of assets on the balance sheet in which show their
liquidity or how much time they usually take to be converted into cash.

1. Cash. No conversion is needed.

2. Marketable securities. A few days may be required to convert to cash in most cases.

3. Accounts receivable. Will convert to cash in accordance with the company's normal credit
terms, or can be converted to cash immediately by factoring the receivables.

4. Inventory. Could require multiple months to convert to cash, depending on turnover levels
and the proportion of inventory items for which there is not a ready resale market. It may
even be impossible to convert to cash without accepting a significant discount.

5. Fixed assets. Conversion to cash depends entirely on the presence of an active after-market
for these items.

6. Goodwill. This can only be converted to cash upon the sale of the business for an adequate
price, and so should be listed last.

IMPORTANCE OF LIQUIDITY

Liquidity is vital in every company or even individuals in accomplishing goals. Although your
assets may be high but the lack of having liquid assets may turn into a big downfall because usually,
illiquid assets are meant for long term appreciation. There may be circumstances in which you or the
company will have to sell assets that is not intended for liquidation to comply with the short term
obligations.

1.1.THE VALUE OF MONEY

The value of money just like the value of goods and services it is determined by the demand for
it. There are different ways on how to measure it. First is the how much the dollar will buy foreign
currencies. This is where Forex traders come into action for they take into consideration the supply
and demand and then determine exchange rates. Then the next method to determine the value of
money is through treasury notes. The value of treasury notes for they can be easily converted into
dollars through the secondary market of Treasurys.

Lastly, is through foreign exchange reserves. These are dollars that is held by foreign government.
The more they hold, the lower the supply in which makes US dollars more valuable.

HOW IT AFFECTS INDIVIDUALS

 The value of money affects you every day. From the juice box you are drinking to the gas you
are pumping. For these are things you cannot delay to buy even when the price rises.

1.4 PRICE INDICES

Changes in the levels of prices are measured using a scale called a price index. This is the
most useful device for measuring change in the price level. Such indices are generally based on a
survey of a sample of the population in question to determine which goods and services compose
the typical market basket.

DIFFERENT PRICE INDICES

1. Consumer Price Index

The consumer price index focuses on goods and services typically purchased by households. This
is used to measure the cost of living which is based on the changes in retail prices. The consumer
price index (CPI), measures cost changes from the viewpoint of the consumer.

2. Producer Price Index

The producer price index (PPI) is a group of indexes that calculates and represents the
average movement in selling prices from domestic production over time. Producer Price Index also
measures price movements from the seller's point of view. In other words this index tracks change to
the cost of production.

3. Export Price Index

Export price is an index calculated for the prices of any specified group of commodities entering
into international trade using F.O.B export prices.

4. Import Price Index

Import price index measures changes in the prices of imports of merchandise into a country. The
index numbers for each reference period relate to prices of imports landed into the country during
the period.

5. GDP Chain Type

This price index is a measure of the level of prices of all new, domestically produced, final
goods and services in an economy. Gross Domestic Product (GDP) is a price index which measures
the inflation and the deflation of an economy by calculating the ratio of nominal GDP to real GDP.

· Nominal GDP- also called unadjusted GDP. It is a macroeconomic measure of the value of the
economy’s output that is not adjusted for inflation.

· Real GDP- This is the macroeconomic measure of the value of the economy’s output
adjusted for price changes or the inflation and deflation.