2.3.2 liquidity

Question 1

definition of a balance sheet

Answer 1

a summary at a given time of the value of a firm’s assets, liabilities and capital

Question 2

current ratio formula

Answer 2

CR = current assets / current liabilities

Question 3

what does a low ratio (> 1.0) indicate?

Answer 3

cash flow problems

Question 4

what does a high ratio (< 2.0) indicate?

Answer 4

too much working capital

Question 5

what is the optimum ratio and what does it indicate?

Answer 5

1.5 - 2.0

efficient management of working capital

Question 6

acid test ratio formula

Answer 6

ATR = (current assets - stocks) / current liabilities

Question 7

definition of liquidity

Answer 7

how easily a business can covert assets into cash to pay off any debts

Question 8

definition of assets

Answer 8

resources that belong to a business

Question 9

definition of current assets

Answer 9

liquid assets - can be turned into cash within a year

Question 10

definition of non-current assets

Answer 10

long-term resources that will be used by the firm repeatedly over a period of time

Question 11

definition of liability

Answer 11

money owed by the firm e.g. to banks and suppliers

Question 12

definition of a current liability

Answer 12

money owed by the firm that must be repaid within a year

Question 13

definition of a non-current liability

Answer 13

money owed by the business for more than a year

Question 14

definition of working capital

Answer 14

the cash available to meet day-to-day operations

Question 15

working capital formula

Answer 15

WC = current assets - current liabilities

Question 16

definition of shareholder’s equity

Answer 16

the amount of money owed by the firm to the shareholders