2.3.2 Liquidity Flashcards
What is the Statement of financial position?
A formal financial document that summarises the net worth of a business at a given point in time
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?
Assets are items of value owned by a business
What are non-current Assets?
Assets that are likely to be kept by the business for more than one year
What are some examples of non-current Assets?
Vehicles
Premises
Machinery
What are current Assets?
Assets Likely to be turned into cash within a year
What are some examples of Current Assets?
Inventories
Accounts Receivable (Debtors)
Cash and Cash Equivalents
What are Liabilities?
Liabilities are the money a business owes i.e. debts
What are non-current Liabilities?
Debts that the business has more than one year to repay
I.e Bank loans
What are Current Liabilities?
Debts that the business may have to repay within one year
I.e
Overdrafts
Accounts Payable (Creditors)
What is Liquidity?
A measure of a firms short term survival i.e. its ability to meet short term debts and day to day expenses
What is the equation for Current ratio?
Current Assets / Current liabilities
What is the equation for the Acid test ratio?
Liquid Assets / Current liabilities
How can a business increse its Liquidity?
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
What is working capital?
Current Assets - Current Liabilities
