Q.Inventory and Prepaid expenses are not considered as Liquid Assets - State reasons.

Liquid assets = assets convertible to cash immediately. Inventory needs to be sold first (uncertain, time-consuming) and prepaid expenses can't be converted to cash at all — hence neither is a liquid asset.

In the TN HSC Class-12 Accountancy syllabus, liquid assets (also called quick assets) are current assets that can be turned into cash immediately or at very short notice. They are computed as Current assets − Inventory − Prepaid expenses.

Why inventory (stock) is not a liquid asset:

• It cannot be converted into cash directly — it must first be sold, and if sold on credit, the debt must then be collected, so two more steps stand between stock and cash.
• The time taken and the amount finally realised are both uncertain (goods may remain unsold or sell below cost). This uncertainty is exactly why the quick ratio removes it.

Why prepaid expenses are not liquid assets: …