Balance Sheet & Liquidity Flashcards
What is a Balance Sheet?
A legally required financial document that summarises the net worth of a business
What is within a balance sheet?
assets and liabilities
What does the balance sheet show a business?
the way the business has raised its capital and uses of it
What are assets?
things a business owns
What are liabilities?
things a business owes
What is the structure of a balance sheet?
Non current assets (Fixed assets) Current assets Current liabilities Working capital Non current liabilities Net assets Financed by Total equity
What are non current assets?
Examples?
also known as fixed assets
things a business owns for more than a year
equipment, land
What are current assets?
examples?
things a business owns for less than a year that can be quickly converted into cash
stock, debtors, cash, trade credit
What are current liabilities?
examples?
Things a business owe less than 1 year
creditors, tax, wages
What is working capital?
current assets - current liabilities
this is the day-to-day wealth inside the business and how much cash is within the business during an average day
What are non current liabilities?
examples?
things a business owes in more than 1 year
loan, mortgage
What are net assets?
(Fixed Assets (non current assets) + working capital) - non current liabilities
What is financed by?
Shares
Reserves (net profit)
What is total equity?
the total of all financed by
What is an intangible asset?
An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate
What need to equal in order for a balance sheet to be correct?
total equity and net assets
What is a balance sheet used to do?
to assess liquidity
What is liquidity?
the ability to pay short-term debts
What are two methods of measuring liquidity?
current ratio
acid-test ratio
What is a current ratio?
ideal?
acceptable?
current assets / current liabilities
2: 1
1. 5:1
What is the acid-test ratio?
ideal?
acceptable?
current assets - stock / current liabilities
1: 1
0. 8:1
What does it mean if the ratios are below the ideal and acceptable levels?
than the business cant pay back short-term debts and may suffer from quick demands and may suffer from insolvency
What does it mean if the ratios are too high?
the company possibly has too much capital invested into stocks and they are not taking advantage of opportunities.
What is the difference between the acid-test ratio and the current ratio?
the acid-test ratio tests if you could pay back short-term debts if you had no stock
But this may be inaccurate for businesses that primarily have most in stocks ie Sainsburys
How would a business improve liquidity ratios?
raising cash
selling non-current assets
agree long term borrowing
reduce short term borrowing
