Final answer:
Prepaid items are not the most liquid assets on a balance sheet; they are payments for future services and cannot be readily converted to cash. Liquid assets are those that are cash or can be quickly turned into cash without losing value.
Step-by-step explanation:
The statement that prepaid items have already been converted to cash and therefore are the most liquid items in the current assets portion of the balance sheet is false. Prepaid items are actually the opposite of liquid; they are payments made in advance for goods or services that will be received in the future. An asset's liquidity is defined by how quickly it can be converted into cash without loss of value. Prepaid expenses cannot be converted directly into cash, they represent future benefits. Therefore, the most liquid assets would be those that are cash or can be quickly converted to cash, such as coins, currency, and demand deposits.