Which of the following describes liquidity?

Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its market price. This concept is crucial for businesses to ensure they can meet immediate financial obligations or take advantage of new opportunities as they arise. When an asset is highly liquid, it can be sold rapidly in the marketplace with minimal loss of value, which is essential for maintaining smooth operations and financial stability.

In contrast, the total revenues generated by a business, the amount of gains realized, and cash transactions are all important financial metrics, but they do not specifically capture the concept of liquidity. Total revenues refer to the income from sales, gains realized pertain to profits from asset sales, and cash transactions reflect specific financial activities rather than the overall capacity to convert assets into cash. Therefore, the defining characteristic of liquidity is best represented by the ability to convert assets to cash quickly.