2.3.2 Liquiduty Flashcards
What is meant by liquidity
Liquidity refers to the ability of a business to pay its short term debt with its short term assets
What is a statement of financial position
It’s a financial statement which gives details of all the assets and liabilities owned or owed by a business. It explains how a business has funded activities, whether it is through debt or equity
What is meant by a current asset and give to examples
A current asset is something a business owns which it can essily turn into cash eg cash, debtors, receivables or inventory
What is meant by a current liability and give two examples
A current liability is something a business owes which it has to pay back quickly eg overdraft and trade credit
What is the formula for current ratio
Current assets/ current liabilities
What is the ideal value for current ratio
1.5:1
What does current ratio measure
It measures how much cash and cash equivalents a business has for every £1 of short term debt it owes
What is the formula for acid test ratio
(Current assets - stock)/ current liabilities
What is the ideal value for the acid test ratio
1:1
Why does the acid test ratio exclude stock
Because this is the least liquid of the current assets and it is not guaranteed that you will be able to sell stock quickly
What is meant by a fixed or non current asset and give 2 example
A fixed asset is something a business owes which it is more difficult or time consuming to turn into cash such as buildings, property vehicles computer machines
What is meant by non current liabilities and give 2 examples
Non current liabilities are things that a business owes but which is can pay back over a long period eg long term loans and morgadges
Suggest 4 ways to improve liquidity
Sell assets, switch an overdraft or trade credit for long term loan, ask customers to pay you more quickly
Why is liquidity important
Liquidity is important because it is the main cause of business failure. If a business doesn’t have enough cash equivalents to pay its short term debt, its creditors will force it into bankruptcy
