Assets And Liabilities

Question 1

What is an asset?

Answer 1

An asset is something a business OWNS

Question 2

What is a liability?

Answer 2

A liability is something a business OWES

Question 3

What is a fixed asset?

Answer 3

A fixed asset is something a business owns that is expected to last longer than a year

Question 4

What is a current asset?

Answer 4

A current asset is something the business owns that is expected to last under a year

Current assets are easy to replace and replenish regularly

Question 5

What are examples of fixed assets?

Answer 5

Tills, fixtures and fittings and delivery vehicles

Question 6

What are examples of current assets?

Answer 6

Raw materials, stock, cash in hand, cash in bank and cash in safe

Question 7

What is a debtor?

Answer 7

A debtor is a customer who owes money to the business for goods they have bought

Question 8

Is a debtor a fixed asset or a current asset?

Answer 8

A debtor is a current asset as they’re expected to pay the business in under a year

Question 9

What is a current liability?

Answer 9

A current liability is an amount a business currently owes and it needs to be paid within a year

It is short term

Question 10

What is a non-current liability?

Answer 10

A non-current liability is an amount that a business owes, that does not have to be paid within a year of the balance sheet date

It is long term

Question 11

What are examples of current liabilities?

Answer 11

Overdraft, short term loan, creditors and bills

Question 12

What are examples of non-current liabilities?

Answer 12

Overdraft, long term loan and mortgage

Question 13

What is an overdraft?

Answer 13

An overdraft is an amount of money that helps cash flow and ensures that customers can have sufficient funds until they are paid. When they are paid the overdraft will be immediately taken out of their accounts on the payday

Question 15

Why can loans be both current and non-current?

Answer 15

Whether a loan is current or non-current depends on the size of the business

A bigger business i.e Tesco, would call a loan of £125,000 a current loan as they can easily pay it off within a year

Whereas a smaller business i.e Yeo Valley would call a loan of £125,000 a non-current loan as they cannot easily pay it off within a year

Question 16

What is working capital?

Answer 16

Working capital measures the short term health of a business

Question 17

What is the calculation for working capital?

Answer 17

Current assets- current liabilities

Question 18

What are the negatives of working capital?

Answer 18

It only shows the short term health of a business, and it does not show business successes or failures as it is just a figure

Question 19

Why can overdraft be both a current and non-current liability?

Answer 19

The size of the overdraft and the size of the business depends whether an overdraft is a current or non-current liability

Question 20

What should you recommend for a business to do after calculating their working capital?

Answer 20

Recommend that the business calculate more ratios - I.e acid test ratio, to fully understand their financial position

Question 21

What’s the structure for answering an 8 marker on working capital?

Answer 21

1) Define working capital
2) List the advantages
3) List the disadvantages
4) Conclude with your recommendations

Question 22

What are the positives of working capital?

Answer 22

It is easy to calculate and the figures are easy to obtain from a balance sheet