2.3.2 liquidity

Question 1

liquidity

Answer 1

a measure of extent to which a business has cash to meet immediate and short term obligations or assets that converted to do this

Question 2

current assets examples

Answer 2

• stock
• debtors
• cash
• bank

Question 3

non current assets

Answer 3

• land
• tools
• vehicles
• brand names

Question 4

current liabilities

Answer 4

• overdraft
• creditors
• short term loan

Question 5

non current liabilities

Answer 5

• long term loans
• mortgage

Question 6

liquidity ratios

Answer 6

assesses whether a business has sufficient cash or equivalent current assets to be able to pay it’s debts as they fall due

Question 7

current ratio formula

Answer 7

current assets / current liabilities : 1

Question 8

1.5-2 current ratio

Answer 8

suggests the business has the ability to repay it’s debts within 12 months

Question 9

low ratio below 1 current ratio

Answer 9

indicates there is not enough cash held by the business to repay it’s short term debts

Question 10

high ratio over 2 current ratio

Answer 10

suggests the business has too much cash tied up in working capital

Question 11

acid test ratio formula

Answer 11

(current assets - stock) / current liabilities x100

Question 12

ideal figure of acid test ratio

Answer 12

1

Question 13

less than 1

Answer 13

business is keeping too much stock for too long

Question 14

trade debtors

Answer 14

amounts owed by a business’ cutomers who have purchased goods but not yet paid for them

Question 15

trade creditors

Answer 15

money owed by the business to suppliers for raw materials/stocks recived but not yet paid for

Question 16

stocks

Answer 16

cash tied up in raw mateiral, work in progress and finished goods waiting to be sold

Question 17

working capital cycle

Answer 17

the period of time between the point where cash is first spent on the production of a product and the collection of cash from the customer

Question 18

working capital formula

Answer 18

current assests - current liabilities

Question 19

main causes of cash flow problems

Answer 19

• low profits
• too much soent on production capacity
• excess stock held
• overtrading - growing the business too fast
• seasonal demand

Question 20

bank loans

Answer 20

long term finance - loan provided over a fixed period

Question 21

bank loans advantages

Answer 21

• generally offered at a lower interest rate
• you do not need to give the lender % profits or share of the company

Question 22

bank loans disadvantages

Answer 22

• no flexibility
• could cause cash flow problems if customers don’t pay promptly- requires security

Question 23

bank overdraft

Answer 23

short term finance, loan facility

Question 24

bank overdraft advantages

Answer 24

• you can borrow what you need to
• flexbility when paying it back

Question 25

bank overdraft disadvantages

Answer 25

• likely to be charged interest when paying it back
• going over arranged limit will negatively affect credit score