2.3.2 liquidity

Question 1

what is a statement of financial position or balance sheet

Answer 1

is a financial document that records he assets and liabilities of a business
snapshot of the value and financial strength of a business

Question 2

what re you able to work out from a balance sheet

Answer 2

financial ratios
liquidity ratio
efficiency ratios

Question 3

what information can you gather from a balance sheet

Answer 3

• value of a business (equity)
• current assets a business holds
• short term liabilities the business will need to pay within a year
• liquidity of a business
• long term debts of a business
• how a business is financed

Question 4

define liquidity?

Answer 4

This is the ability of a business to pay its debts and liabilities in cash when debts fall due

Question 5

what is current ratio and why is it important

Answer 5

a key liquidity ratio, compares current assets with current liabilities assessing whether a business has sufficient working capital

Question 6

how do you work out current ratio?

Answer 6

current liabilities

Question 7

what is acid test ratio and why is it important?

Answer 7

acid test ratio is considered a more severe measure of liquidity, doesn’t account for the inventories of a business

Question 8

how do you work out acid test ratio

Answer 8

current liabilities

Question 9

what is working capital and why is it useful

Answer 9

this is the money within a business for day to day expenses like wages, bills, rent
however they take into account other assets like stocks and so on however they cant easily be turned into cash

Question 10

how do you work out working capital

Answer 10

all current assets - current liabilities