35. Liquidity

Question 1

Liquidity

Answer 1

The ease with which assets can be converted into cash.

Question 2

Current ratio =

Answer 2

current assets / current liabilities

Question 3

Acid test ratio =

Answer 3

current asets - inventories / current liabilities

Question 4

Ways to improve liquidity:

Answer 4

• Sale of assets or leaseback
• Supplier credit terms
• Factoring
• Inventory JIT

Question 5

Managing working capital:

Answer 5

• Size of business
• Inventory levels
• Debtors and creditors

Question 6

Acid test ratio

Answer 6

similar to the current ratio but excludes stocks from current assets. A more severe test of liquidity.

Question 7

Assets

Answer 7

resources that belong to a business

Question 8

capital

Answer 8

money put into a business by the owners

Question 9

Current assets

Answer 9

Liquid assets, i.e. those assets that will be converted into cash within 1 year

Question 10

Current liabilities

Answer 10

Money owed by the business that must be repaid within 1 year

Question 11

Current ratio

Answer 11

Assesses whether or not a business has enough resources to meet any debts that arise in the next 12 months. It is found by dividing current liabilities into current assets.

Question 12

Debt factoring

Answer 12

When a financial institution called a factor takes over the administration of a company’s receivables (= money owed by suppliers). The factor pays the business the money that suppliers owe to it immediately, in return for a percentage

Question 13

Intangible assets

Answer 13

non-physical assets, such as brand names, patents and customer lists

Question 14

Inventories

Answer 14

Stocks, such as raw materials and finished goods held by a business

Question 15

Liabilities

Answer 15

Money owed by the business to banks and suppliers, for example

Question 16

net assets

Answer 16

total assets - total liabilities

Question 17

non-current assets

Answer 17

long-term resources that will be used by the business repeatedly over a period of time

Question 18

non-current liabilities

Answer 18

money owed by the business for more than 1 year, sometimes called long-term liabilities.

Question 19

Shareholders’ equity

Answer 19

The amount of money owed by the business to the shareholders

Question 20

Statement of financial position (balance sheet)

Answer 20

a summary at a particular point in time of the value of a firm’s assets, liabilities and capital

Question 21

trade and other payables

Answer 21

money owed by the business to suppliers and utilities, for example. Sometimes called trade creditors.

Question 22

Trade and other receivables

Answer 22

Money owed to the business by customers and any repayments made by the business.

Question 23

Working capital

Answer 23

the funds left over to meet day-to day expenses after current debts have been paid. It is calculated by subtracting current liabilities from current assets