2.3.2 Liquidity

Question 1

Why is a balance sheet called a balance sheet?

Answer 1

Total assets always equal total liabilities

Question 2

What is another name for balance sheet?

Answer 2

Statement of financial income

Question 3

What does a balance sheet show?

Answer 3

Organisations assets, liabilities and amount of capital invested into business at a given time

Question 4

What is shareholders capital?

Answer 4

Money invested into business by owners (through sales of shares)

Question 5

What do net assets determine?

Answer 5

Financial health of company

Question 6

What is working capital?

Answer 6

Money in the business to pay day-to-day expenses (net current assets)

Question 6

Working capital formula

Answer 6

current assets - current liablilities

Question 7

What is liquidity?

Answer 7

How quickly an assets can be converted into cash

Question 8

What is liquidity a measure of?

Answer 8

ability to pay short term debts

Question 9

Total equity formula

Answer 9

share capital + retained profit

Question 10

What are liabilities?

Answer 10

something business owes

Question 11

what is the difference between current liabilities and non-current?

Answer 11

current - normally paid off in a year
non-current - normally paid off over more than a year

Question 12

what is capital (equity)?

Answer 12

difference between value of assets and liabilities

Question 12

what is solvency?

Answer 12

compares assets to liabilities - enough money to pay bills?

Question 13

what are assets?

Answer 13

something business owns

Question 14

what is capital employed?

Answer 14

money needed to be invested to allow business to function

Question 15

formula for return on capital employed (ROCE)

Answer 15

operating profit/ capital employed x100

Question 16

what does ROCE show? (3)

Answer 16

• return business getting from money they put into it
• would business be better putting their money in bank account?
• generally higher better

Question 17

what can liquidity ratios show?

Answer 17

position of liquidity and solvency by using balance sheets and profit + loss accounts

Question 18

formula for current ratio

Answer 18

current assets/ current liabilities :1

Question 19

what does current ratio show?

Answer 19

(working capital ratio)
above 2:1 = too much money in assets that aren’t making money
below 1.5:1 = might be liquidity problem

Question 20

formula for the acid test

Answer 20

current assets - inventory/ current liabilities

Question 21

what is ideal ratio for acid test?

Answer 21

1:1 - less than = current assets don’t cover current liabilities

Question 22

what does acid test show?

Answer 22

harsher test of liquidity as cannot guarantee to sell all stocks

Question 23

capital employed formula

Answer 23

non-current liabilities + total equity

Question 24

gearing ratio formula

Answer 24

non-current liabilities/ capital employed x100

Question 25

after what % is a business considered to be highly geared?

Answer 25

50% - high debt to equity ratio

Question 26

how can a business increase liquidity?

Answer 26

• reduce stock e.g dispatch quicker
• lease unused machinery