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A-Level Business Theme 2 > 2.3.2 - Liquidity > Flashcards

2.3.2 - Liquidity Flashcards

1
Q

What is a statement of financial position (balance sheet)?

A

Financial document that summarises the net worth of a business at a given point in time

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2
Q

What are non current assets?

A

Likely to be kept by a business for more than one year

  • vehicles
  • premises
  • machinery
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3
Q

What are current assets?

A

Likely to be turned into cash within a year

  • inventories
  • debtors
  • cash
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4
Q

What are assets?

A

Items of value owned by a business

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5
Q

What are liabilities?

A

Money a business owes

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6
Q

What are non current liabilities?

A

Debts a business has more than one year to repay

* bank loans

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7
Q

What are current liabilities?

A

Debts a business must repay within a year

  • overdrafts
  • creditors
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8
Q

What does the second half of a statement show?

A

How net worth has been financed

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9
Q

What is liquidity?

A

Measure of a firms short term survival

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10
Q

How can liquidity be measured?

A
  • current ratio

* acid test ratio

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11
Q

What is current ratio?

A

Current assets : Current liabilities

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12
Q

What is current ratio?

A

Current assets : Current liabilities

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13
Q

What is acid test ratio?

A

Current assets - stock : Current liabilities

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14
Q

Why is inventory not included in current assets?

A

Deemed the hardest to turn into cash quickly

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15
Q

When will a business with low liquidity be in danger?

A

If short term creditors demand payment quickly

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16
Q

How can a business improve liquidity?

A
  • sell unproductive assets
  • monitor debtors
  • long term sources of finance
17
Q

What is working capital?

A

A measure of a firms liquidity

18
Q

How is working capital calculated?

A

Current assets - current liabilities

19
Q

Where is working capital on a statement of financial position?

A

As net current liabilities or net current assets

20
Q

What’s the purpose of what working capital?

A

Answers the basic question that if a firm had to pay off all its short term debts, could it do so out of its short term cash resources?

21
Q

If a firm had to pay off all its short term debts and it couldn’t do so out of its short term cash resources, what would the business have to do?

A

Sell non current assets to pay its debts and possibly cease trading

22
Q

What is the working capital cycle?

A
  • buy materials
  • produce goods
  • sell to customers on credit
  • customers (debtors) pay up
    Repeat
23
Q

What else is important other than managing liquidity?

A
  • efficient production
  • effective management of stock
  • effective marketing
  • efficient distribution

A-Level Business Theme 2 (23 decks)

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