2.3.2 Liquidity Flashcards
Define a balance sheet
- A statement which shows the value of a business’s assets and the value of their debts
- Snapshot of assets and debts
What is meant by Non current assets
- Assets which will stay within the business for the next 12 years, for eg machinery
What is meant by current assets
- Assets which the business owns however may not own in 12 month time
How do you calculate Total assets
Non current + current
What is meant by Non current liabilities
- Debt which must be paid within the next 12 months . eg trade credit
What is meant by non current liabilities
- Debt which will take longer than 12 months to be repaid
What is meant by Current liabilities
- Debts which must be paid within the next 12 months
How do you calculate Total Liabilities
Current + non current
What is meant by net assets
- Value of the business’s assets compared to its liabilities
How do you calculate net assets
Total Assets - Total liabilities
What are other sources of finance which balances total assets ?
- Share profit
- Retained profit
What is total equity ?
- Additional funds which have come into firm to pay for the assets it has secured.
What are some ways to improve liquidity
- Sale of fixed assets
- Postponing investments, hold onto the money instead
- Reduce credit period offered to customers
How do you calculate the current ratio
total current assets/total current liabilities
What figure suggests that a business is relatively liquid
- If they have a ratio of 1.5-2.5
What figure suggests a business may be illiquid
Under 1
Why may a very high ratio not be good for a business?
- Too much working capital tied up in debtors and inventories
What is different about acid test ratio ?
- You eliminate the asset which is the hardest to turn into cash
Why may the acid test ratio be a better indicator of liquidity within a business?
- ## Better ratio for businesses which have large amounts of stock
Why may it not be suitable for some business ?
- Less relevant for business’s with high stock turnover such as supermarkets which sell most of their stock
Why is working capital important to maintain at steady levels
- Stock control so less stock is tied up in cash, therefore reducing liquidity
