2.3.2 - Liquidity Flashcards
What is a Statement of Financial Position? What is it also known as?
It shows a business’s assets, liabilities, and capital at a fixed point in time. It’s also called a balance sheet as total assets always equal total liabilities and equity.
What is the Net Assets Value?
It’s the total assets (fixed and current) minus total liabilities (current and non-current). It equals the total equity value on the balance sheet.
What Are Non-Current Assets?
Long-term assets like property or equipment that businesses keep for over a year. Their value decreases over time due to depreciation.
What Are Current Assets?
Short-term assets likely to be turned into cash within a year, like inventory or receivables. They are listed together as total current assets.
What Are Current Liabilities?
Debts that must be paid within a year, such as taxes, overdrafts, or payables. They are subtracted from assets to calculate net current assets.
What Are Non-Current Liabilities?
Long-term debts like loans or mortgages, paid off over several years. They are listed separately from current liabilities.
What Are Bad Debts?
Debts unlikely to be repaid by debtors, written off as expenses in the income statement. They are not included as assets on the balance sheet.
What is the Current Ratio?
It compares current assets to current liabilities (current assets ÷ current liabilities). A ratio of 1.5–2 is considered ideal.
What is the Acid Test Ratio?
It measures liquidity by excluding inventory from current assets ((current assets - inventory) ÷ current liabilities). A ratio above 1 is ideal for most businesses.
What is Working Capital?
The cash and liquid assets available for daily operations, calculated as current assets minus current liabilities. It reflects the business’s liquidity.
What is the Working Capital Cycle?
It’s the time between buying raw materials and receiving cash from sales. A shorter cycle means quicker access to cash.
Why Do Businesses Need Enough Cash?
To pay short-term debts and manage daily expenses. Too much cash can be idle, while too little can risk insolvency.
What Factors Affect Cash Needs?
Long working capital cycles, inflation, or business expansion increase cash requirements. Managing cash flow efficiently is crucial.
