2.3.2 Liquidity

Question 1

Liquidity

Answer 1

The ability of a business to turn its assets into cash to pay its current liabilities

Question 2

What is the most liquid asset?

Answer 2

Cash

Question 3

What is a statement of financial position?

Answer 3

A plc or ltd business have to publish their accounts by law

balance sheet

Question 4

Why do business owners use liquidity?

Answer 4

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

Question 5

What are the two ratios to measure liquidity?

Answer 5

Current ratio

Acid test ratio

Question 6

What is the ideal current ratio?

Answer 6

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

Question 7

Acid test ratio

Answer 7

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

Question 8

Working capital

Answer 8

The day-to-day finance needed in a business and can be calculated by CA-CL