2.3.2 Liquidity Flashcards
What is liquidity?
amount of cash a business has and it shows if they have enough cash to pay debts over the coming months
What will happen if a business has liquidity problems?
It won’t be able to pay short-term debts and if continues it will be insolvent
What does insolvent mean
Unable to pay their bills
What is working capital?
The capital of a business which is used in its day-to-day trading operations
What must a business have to run efficiently?
working capital to pay wages, bills etc
What does a statement of financial position show? (balance sheet)
shows the financial structure of a business at a specific point in time
It identifies a business’s assets and liabilities to see if they’re able to pay their bills over the next 12 months
What are assets?
What the business owns
What are fixed assets?
(non-current)
Assets that the business has kept for more than 1 year
(creates revenue for business eg machinery)
What are current assets?
Assets that the business expects to keep for less than 1 year
(raw materials)
(converted to cash fast)
What are liabilities?
What the business owes
What are long-term liabilities?
(non-current)
Debts that will be paid back over 1 year
(eg, mortgage, property loan)
What are current liabilities?
Debts that will be paid back within 1 year
(eg, overdraft, trade credit)
What does the total equity section on a balance sheet show?
The value of a company’s assets after deducting liabilities
Shows the business’s net worth
What is the formula for net assets (equity)?
Total assets - total liabilities
What does the current ratio show?
How many times short-term debts can be paid out of current assets
The result indicates how many £s of current assets it has available to cover each £1 of short-term debt
