2.3.2 Liquidity Flashcards
Liquidity
The ability of a business to turn its assets into cash to pay its current liabilities
What is the most liquid asset?
Cash
What is a statement of financial position?
A plc or ltd business have to publish their accounts by law
balance sheet
Why do business owners use liquidity?
They can use it as a measure of how healthy the business is, this it doesn’t have too many debts and that it can easily pay its bills
What are the two ratios to measure liquidity?
Current ratio
Acid test ratio
What is the ideal current ratio?
1.5:1
lower than this there is not enough money to pay its bills
Higher than this and there is too much money tied up in stock
Acid test ratio
Doesn’t include stock
if a business has an acid test ration of less than 1:1 then its current assets do not cover liabilities
Working capital
The day-to-day finance needed in a business and can be calculated by CA-CL