Current assets can be listed in the order of their liquidity. Of the following current assets, which one is the least liquid?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Prepaid expenses
Option (1) Debtors — Incorrect. Debtors only have to pay what they owe, so they turn into cash fairly soon. They come fourth in the order of liquidity.
Option (2) Work in progress — Incorrect. Work in progress must first be finished and sold before it brings in cash. It comes sixth.
Option (3) Bills receivable — Incorrect. Bills receivable are written promises to pay on a fixed date. They come third, just after cash and marketable securities.
Option (4) Prepaid expenses — Correct. An asset is more liquid if it turns into cash quicker and without loss of value. A prepaid expense is a payment made in advance for a service still to come. It is used up over time, not sold for cash, so it comes last (eighth).
NCERT (2026-27 Edition): “Working Capital Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. Examples of current assets, in order of their liquidity, are as under. |