2.3.2 LIQUIDITY Flashcards
whats working capital
amount of money that is used in day to day trading operations
how to calculate working capital
current assets - current liabilities
what are current assets
things a business owns that can be quickly turned into cash within a year (receivables)
current liabilities
businesses short term debts that need to be payed within a year (payables)
what is liquidity
how quickly you can get hold on your cash (if your liquid you can get your cash quickly)
whats a balance sheet
a financial statement that shows a company’s financial position at a specific point in time. it includes assets, liabilities and shareholders equity
whats a non-current asset
long term asset that isn’t expected to be converted into cash within a year
whats a non-current liability
long term obligation that are not expected to be settled within a year
whats an intangible asset
a non physical asset with long term value (eg. trademarks and copyrights)
whats a tangible asset
a physical asset that can be seen and touched (eg. cash, inventory )
what are borrowings
refers to the funds that a company or individual obtains from external sources such as banks
what are net assets
represents the residual value of a company’s assets after deducting its liabilities
what are ordinary shares
represents ownership in a company, the most common type of a share in a company
whats share premium
additional amount of money that a company receives when it issues its shares at a higher price than normal value
what are accumulated losses
the total amount of losses a business has incurred over time
how to calculate current ratio
current assets / current liabilities
how to calculate acid test ratio
(current assets - inventories) / current liabilities
what does it mean if the ratio is less than 1:1 (acid test)
current assets do not cover its current liabilities, this could be a problem for the business
what does it mean if the ratio is 1.5:1 - 2:1 (current)
the business has plenty of working capital to meet its day to day bills
what does it mean if the ratio is above 2:1 (current)
then too much money is tied up in assets that are not making any money
what does it mean if the ratio is below 1.5:1
might be a problem but many retail stores operate at 1:1 as they have fast moving stocks and generate cash from sales
