2.3.2 Flashcards
What is a balance sheet?
Also known as a statement of financial position
A statement of financial position shows the value of a business’s assets and debts.
What should you look out for on a balance sheet table?
(000s)
On the balance sheet, assets will be split into two sections. What are they? Give examples or describe what they are.
Non-current assets ( Property, machinery)
Current Assets ( Items that business may not have in the next 12 months, Stock and Cash)
On the balance sheet, liabilities are split into two sections. What are they? Give examples or describe what they are.
Current Liabilities ( Debts which will be re-paid over the next 12 months, overdraft or debt to suppliers)
Non-current liabilities ( Long term debt such as mortgage)
How would you calculate Net Assets?
Net assets = total assets - total liabilities
On the Statement of Financial Position we also have small sections to show external money flowing into the business. What could examples be (2)?
Share capital Eg 1000
Retained profit Eg 500
We can work out something called Total Equity. How would you work this out on the balance sheet?
Adding up the external money flow, for example share capital and retained profit.
Why does Total assets and Total equity have to be the exact same?
On the balance sheet the Total Assets and Total liabilities will be different. Eg - Total assets, 6000. But Total Liabilities are 4500.
As a result, the business has accumulated 1500 Net assets, while only borrowing 4500. Therefore, total equity must explain and show where the inflow of cash came from.
This could be Share capital, retained profit ….etc
What is a Current Ratio? Formula
Current assets/Current Liabilities : 1
Why is the Current Ratio used by businesses?
To make sure that they have enough liquid assets to cover the cost of month to month current liabilities.
Prevents the risk of disrupting contracts between suppliers and maintains good brand image.
What does the term ‘Liquid’ mean?
Items which can be turned into Cash relatively fast in order to cover current liabilities
What is the desired value of current ratio?
Cannot determine for every business, however 1-1.5 is the usual desired ratio. This shows that they are available to pay off current liabilities.
Less than one means that the business is insolvent, could ruin relationships with suppliers and could add fees.
Very high current ratio could show that the business is inefficient, could be better to re-invest cash rather than hold too much cash
What is the Acid Test Ratio Formula?
(Current Assets - Inventory)/ Current liabilities
What is the Acid Test Ratios desired amout?
Lower than the current ratio, due to inventory not being included
Desired will be 1. This means value of assets are equal to value of liabilities.
What does an Acid Test Ratio of less than one mean for a business?
Insolvent, if debts come around they will not be able to pay.
