2.3.2 Liquidity Flashcards
Why is a balance sheet called a balance sheet?
Total assets always equal total liabilities
What is another name for balance sheet?
Statement of financial income
What does a balance sheet show?
Organisations assets, liabilities and amount of capital invested into business at a given time
What is shareholders capital?
Money invested into business by owners (through sales of shares)
What do net assets determine?
Financial health of company
What is working capital?
Money in the business to pay day-to-day expenses (net current assets)
Working capital formula
current assets - current liablilities
What is liquidity?
How quickly an assets can be converted into cash
What is liquidity a measure of?
ability to pay short term debts
Total equity formula
share capital + retained profit
What are liabilities?
something business owes
what is the difference between current liabilities and non-current?
current - normally paid off in a year
non-current - normally paid off over more than a year
what is capital (equity)?
difference between value of assets and liabilities
what is solvency?
compares assets to liabilities - enough money to pay bills?
what are assets?
something business owns
what is capital employed?
money needed to be invested to allow business to function
formula for return on capital employed (ROCE)
operating profit/ capital employed x100
what does ROCE show? (3)
- return business getting from money they put into it
- would business be better putting their money in bank account?
- generally higher better
what can liquidity ratios show?
position of liquidity and solvency by using balance sheets and profit + loss accounts
formula for current ratio
current assets/ current liabilities :1
what does current ratio show?
(working capital ratio)
above 2:1 = too much money in assets that aren’t making money
below 1.5:1 = might be liquidity problem
formula for the acid test
current assets - inventory/ current liabilities
what is ideal ratio for acid test?
1:1 - less than = current assets don’t cover current liabilities
what does acid test show?
harsher test of liquidity as cannot guarantee to sell all stocks
capital employed formula
non-current liabilities + total equity
gearing ratio formula
non-current liabilities/ capital employed x100
after what % is a business considered to be highly geared?
50% - high debt to equity ratio
how can a business increase liquidity?
- reduce stock e.g dispatch quicker
- lease unused machinery
