Final answer:
The difference between liquidity and solvency lies in their meanings and implications within a business. Liquidity refers to short-term obligations and the ability to access cash, while solvency relates to the long-term financial stability and ability to cover debts.
Step-by-step explanation:
The difference between the liquidity and solvency of a business lies in their meanings and implications. Liquidity refers to how easily a business can convert its assets into cash or meet its short-term obligations. It is a measure of the business's ability to quickly access cash or raise funds.
Solvency, on the other hand, refers to the long-term financial health and stability of a business. It indicates whether a business has enough assets to cover its long-term debts and obligations. Solvency is essential for the business's sustainability and ability to continue its operations in the long run.
An example to understand the difference would be if a business has $1 million of inventory, but is unable to sell it quickly and convert it into cash, it may face liquidity issues. However, if the business has significant assets that can cover its long-term debts and obligations, it would be considered solvent.