2.3.2 Liquidity

Question 1

liquidity

Answer 1

measure of firms short term survival - ability to meet short term debts
statement of financial position
- has non current & current assets
- non current & current liabilities

net assets = total assets - total liabilities
equity = capital + retained profit

Question 2

current ratio

Answer 2

current assets ÷ current liabilities
1.5-2 = aim
low - cash problems and harder to pay short term debts
high - too much working capital
working capital = short term cash - current assets - current liabilities

Question 3

acid test ratio

Answer 3

current assets - stock ÷ current liabilities
significantly less than 1 = bad - little cash to pay short term debts
current assets : current liabilities

Question 4

Improving liquidity

Answer 4

• increase current assets / reduce
• sell assets no longer in use
• switch to long term sources of finance
• monitor debtors