Here is a glossary of financial terms L. These financial terms begin with the letter L, including LIFO, liability, and liquidity.
Last in, first out
Last in, first out (LIFO) is an assumption used in inventory valuation and other processes. LIFO assumes that the last products purchased or produced are the first sold or consumed.
The LIFO method is also used in security purchases. If securities are sold, the LIFO method would assume the last securities purchased are the first sold.
Alternatives to the LIFO method are the first in, first out (FIFO) or weighted average methods.
A liability is a debt that a business owes. Liabilities are one of the five types of accounts and are shown on the balance sheet. They are included in the accounting equation where assets equal liabilities and equity.
See last in, first out.
- Liquidity is the concept of nearness to cash. Cash is a liquid asset. Marketable securities are liquid because they can be converted to cash quickly. Land is illiquid because it may take months to sell.
- Liquidity for a company is the ability to pay cash to meet current debts when they are due. This is also called solvency.
Liquidity ratios are financial ratios that show a company’s ability to pay debts in the short term. Liquidity refers to the ease of converting an asset into cash. Liquidity ratios focus on a company’s balance sheet. The liquidity ratios are:
- net working capital
- current ratio
- quick ratio
- cash ratio
A loss is a decrease in the value of an asset or other property. The opposite of a loss is a gain, where the value of the asset is greater than its cost. A loss decreases the profit of a company.
If the market price of an asset is below its cost, there is an unrealized loss. If the asset is sold for less than its cost, it is a realized loss.
In taxation, a loss can be classified as a short-term loss or a long-term loss. Short-term losses occur when the asset is held for one year or less. A long-term loss is for holding periods longer than one year.
Jeff Mankin teaches financial literacy and Excel. He is the founder of Finally Learn.