2.3.2 Liquidity Flashcards
Describe the statement of financial position / balance sheet
- Statement of financial position (balance sheet)
- A formal financial document that summarises the net worth of a business at a given point in time
- It balances net assets with total equity
What is net worth
•Net worth is if you took all of a business’ assets and turned them into cash and then paid off all of the businesses liabilities how much would be left?
What are assets
Are items of value owned by a business
Describe non current assets
- Likely to be kept by the business for more than one year
- Vehicles
- Premises
- Machinery
Describe current assets
- Likely to be turned into cash within a year
- Inventories
- Accounts Receivable (Debtors)
- Cash and Cash Equivalents
What are liabilities
Are the money a business owes
What are non current liabilities
Debts that’s the busineess has more than one year
Eg bank loans
What current liabilities
Debts that the business may have to repay within 1 year
What is liquidity
A measure of a firms short term survival
Ability to meet short term debts and days to day expenses
How do you Measure liquidity
Current ratio
Acid test ratio
How to do you calculate current ratio
Current assets / current liabilities
How do you calculate acid test ratio
Current assets - stock / current liabilities
Businesses may therefore seek to improve liquidity by
- Increase current assets and/or reduce current liabilities
- Sell assets that are no longer being used i.e. turn them from a non-current assets to a current asset (cash)
- Move cash balances from current accounts to high interest bearing accounts so its value increase more rapidly
- Switch to long term sources of finance
- Monitor debtors to avoid bad debts
Define working capital
A measure of the firms liquidity / ability to meet day to day expenses
How do you work out working capital
Ca- cl
