Final answer:
The ability to convert assets into cash is called liquidity, and the ability of a business to pay its debts is known as solvency. Working capital and current ratio are financial measures used to assess a company's liquidity and solvency.
Step-by-step explanation:
The ability to convert assets into cash is called liquidity, while the ability of a business to pay its debts is called solvency. Two financial measures for evaluating a business's liquidity and solvency are working capital and the current ratio.
Liquidity refers to how quickly you can use a financial asset to buy a good or service. For instance, cash is very liquid whereas a savings account is less so, as it typically requires a trip to the bank or ATM to access the funds. Evaluating a business's liquidity can include looking at assets like cash or other assets that can be easily converted to cash without significant loss of value.
On the other hand, a company's solvency is its ability to meet its long-term obligations and continue operating in the long term. This includes the ability to pay interest on debt and to repay the principal amount when it's due. The working capital and current ratio are two key measures of liquidity and solvency, respectively, with working capital comparing current assets to current liabilities, and the current ratio being a quotient of those two figures.