Victor Preston Foundation

  Liquidity ratios measure the ability of a company to use its short-term assets to meet its short-term liabilities (1,2). Short-term assets, also called current assets, include cash, cash equivalents, accounts receivable, and inventory. Short-term liabilities, also called current liabilities, are the payments due within the upcoming 12 months. Short-term liabilities include accounts payable to suppliers, interest on loans, and the portion of the loan balance due. For the purposes of this article, we will lump the different types of short-term liabilities together under “current liabilities”. This is done to focus on the impact of the subcategories of current assets. The most commonly used liquidity ratios are the Current Ratio , Quick Ratio , and Cash Ratio . The Current Ratio is calculated by dividing current assets by current liabilities. Current Ratio = (Cash + Cash Equivalents + Accounts Receivable + Inventory) / Current Liabilities The Current Ratio greater than 1 indic...

  Mental accounting is a behavioral economics concept that people separate their money into discrete buckets based on subjective criteria. These buckets are often based on the source of the money or the intended use of the money (1). Recent work has found the effects of mental accounting are influenced by individual personality traits and cognitive factors (2), such as the perception of scarcity (3). Mental accounting provides a theory as to why people treat sources of income differently. For example, people treat tax refunds differently than their paycheck. The differential treatment occurs despite the fact that a tax refund and a paycheck are both simply sources of income (4). Through mental accounting people often place a tax refund in the “found money” bucket. They then use the tax refund for frivolous expenditures rather than saving for their future. This may occur because a tax refund is an unexpected and infrequent event (i.e. “found money”). Compare this with the e...