2.3.2 - Liquidity

Question 1

Def liquidity

Answer 1

The ability of a business to find the cash it needs to pay its bills. The cash must be readily available either in bank account or form of payment from customer due very soon

Question 2

What companies are required to send a statement of financial position to companies house

Answer 2

All limited companies

Question 3

Def statement of comprehensive income

Answer 3

A financial document that summarises the net worth of a business: records, assets and liabilities and how business raised and spends capital

Question 4

Where do u look on balance sheet to measure liquidity

Answer 4

Just above half way up. Current assets and current liabilities

Question 5

The two ways measuring liquidity can be done

Answer 5

Current ratio and acid test ratio

Question 6

Def current assets

Answer 6

Items the business owns that are in the form of cash or can be easily turned into cash easily without a major loss in their value

Question 7

Def current liabilities

Answer 7

Are debts owed by the business that are due to be paid within the next 12nmonths

Question 8

3 examples of non current assets

Answer 8

• land and building
• plants and machinery
• goodwill

Question 9

3 examples current assets

Answer 9

• cash balances
• trade debtors
• inventories

Question 10

2 examples current liabilities

Answer 10

• trade creditors

- short term borrowing overdrafts

Question 11

2 examples non-current liabilities

Answer 11

Long-term borrowing

Other long term liabilities

Question 12

Which liquidity ratio counts inventories

Answer 12

Current ratio

Question 13

Ideal current ratio

Answer 13

1.5:1

Question 14

Current ratio formula

Answer 14

Current assets / current liabilities

Question 15

Why is acid test a ‘tougher test of liquidyt’

Answer 15

Doesn’t count inventories/ stock as a liquid asset

Question 16

Acid test ratio formula

Answer 16

(Total current assets - inventories) / current liabilities

Question 17

What is the ideal value for acid test ratio

Answer 17

1:1

Question 18

4 ways to improve liquidity

Answer 18

• selling under-used fixed assets such as equipment or machinery
• raising more share capital
• increasing long term borrowing through loans
• postponing planned investments

Question 19

Def fixed assets

Answer 19

Items owned by the business which it intends to use over and over to generate orifit

Question 20

Def working capital

Answer 20

Is the money that is available for the day to day running of the business

Question 21

2 ways to actively manage the working capital cycle

Answer 21

• ensuring there is enough money in the system all together

- making sure dash moves through the cycle as quickly as possible

Question 22

Working capital cycle 4 stages

Answer 22

Capital injected into business
Sell to customers on credit 
Debtors lay up 
Buy materials 
Produce goods

Question 23

Is there is distractions to working capital cycle a business should

Answer 23

• control cash used, keeping cash as low as possible eg reducing stock levels and controlling credit periods
• minimise spending on fixed assets
• plan ahead to estimate carefully the amount of cash that will be needed in the next few months

Question 24

Why working capital is important to business

Answer 24

Produce goods, pay suppliers on time, purchase equipment/ raw materials