Reference Material
Here are a list of financial terms, ratios and other information that can help clarify some of the financial concepts that may be involved with bankruptcy. Some of these ratios can help individuals develop a better understanding of their own financial situation. However, it is important to note that the information provided here isn’t intended to give a complete understanding of finances. Additionally, this information isn’t intended as financial advice. Only a professional with access to complete financial information is qualified to offer counsel in relation to bankruptcy or any other financial matters. The information provided here is only intended as a reference to assist individuals with gaining a better, general understanding of financial information.
- Liquid Assets: Investments, cash equivalents, financial instruments or other items of value that can be converted into money relatively quickly.
- Non-liquid Assets: Financial instruments or items that have relatively long waiting periods, holds, or other barriers to being converted into money
- Cash: A broader term for liquid assets, usually including money and other assets that can easily be converted into money in a relatively short period of time.
- Money: A term typically used in reference to specific monetary units (dollars, pounds, etc.)
- liabilities: A total of debts and other financial obligations an individual is responsible for making payments on over a given time period.
- Total Assets: A total of both liquid and non-liquid assets.
- Net Worth: The difference between an individuals assets and their liabilities. A negative net worth means that an individual has acquired more liabilities than their current assets.
A liquidity ratio calculates the amount of cash or cash equivalents that an individual has at their immediate disposal. In this context, cash refers directly to money, or assets that can be liquidated into money in a relatively short amount of time.
This ratio is typically used in finance to determine an individual’s ability to deal with an emergency that might disrupt their normal flow of income.
Liquidity Ratio = Cash and Cash Equivalents / Monthly Expenses
As this is written, the answer should be the number of months which an individual can maintain their current expenses, without any income.
As the name implies, the asset to debt ratio calculates that amount of assets an individual has against the amount of liabilities they’ve accumulated. Depending on what income bracket and earning phase an individual is in, different answers may be ideal. A financial professional should be able to help with this determination.
Asset To Debt = Total Assets ( liquid and non-liquid) / Total Liabilities
As this is written, the answer should be the number of times an individual’s assets could be used to pay of their current liabilities. If this number is less than one, it means that an individual is not currently capable of paying of their liabilities with their total assets.
The solvency ratio compares an individual’s net worth against their current total assets. This ratio is often used to assess the ability of an individual to make payments on their liabilities in the event that income flows are disrupted.
Asset To Debt = Net Worth (Assets – Liabilities) / Total Assets
As this is written, the answer should be the number of times an individuals assets could be used to pay of their current liabilities.