Cash, Profit, Liquidity and Profitability

Question 1

Cash, profit, liquidity and profitability are all linked to the health of an enterprise.
Analysing them will reveal what?

Answer 1

Analysing them will reveal whether an enterprise is:
1) Solvent - able to pay its debts
Or
2) Insolvent

Question 2

Cash is the money that an enterprise has. It is what?

Answer 2

It is:
1) The coins and notes on the premises
2) Money in the bank

Question 3

Cash is the money that an enterprise has. It is the coins and notes on the premises and money in the bank.
The value of an enterprise’s cash appears in the statement of financial position as a what?

Answer 3

The value of an enterprise’s cash appears in the statement of financial position as a current asset

Question 4

Cash is the money that an enterprise has. It is the coins and notes on the premises and money in the bank.
The value of an enterprise’s cash appears in the statement of financial position as a current asset.
It is the most … form of an asset?

Answer 4

It is the most liquid form of an asset

Question 5

Cash is the money that an enterprise has. It is the coins and notes on the premises and money in the bank.
The value of an enterprise’s cash appears in the statement of financial position as a current asset.
It is the most liquid form of an asset as it means the enterprise is able to do what?

Answer 5

It is the most liquid form of an asset as it means the enterprise is able to pay its short-term debts

Question 6

Cash is the money that an enterprise has. It is the coins and notes on the premises and money in the bank.
The value of an enterprise’s cash appears in the statement of financial position as a current asset.
It is the most liquid form of an asset as it means the enterprise is able to pay its short-term debts.
These debts include …

Answer 6

These debts include suppliers who may not be willing to continue to supply the enterprise

Question 7

Cash is the money that an enterprise has. It is the coins and notes on the premises and money in the bank.
The value of an enterprise’s cash appears in the statement of financial position as a current asset.
It is the most liquid form of an asset as it means the enterprise is able to pay its short-term debts.
These debts include suppliers who may not be willing to continue to supply the enterprise, which could mean what?

Answer 7

These debts include suppliers who may not be willing to continue to supply the enterprise, which could mean it will be unable to make a profit

Question 8

The difference between cash and profit:
What is profit?

Answer 8

Profit is what is left once all costs have been deducted from revenue

Question 9

The difference between cash and profit:
Profit is what is left once all costs have been deducted from revenue. Figures for profit appear where?

Answer 9

Figures for profit appear in the statement of comprehensive income

Question 10

The difference between cash and profit:
Profit is what is left once all costs have been deducted from revenue. Figures for profit appear in the statement of comprehensive income.
Profit only becomes cash once what?

Answer 10

Profit only becomes cash once the enterprise has received payment for its products

Question 11

The difference between cash and profit:
Profit is what is left once all costs have been deducted from revenue. Figures for profit appear in the statement of comprehensive income.
Profit only becomes cash once the enterprise has received payment for its products. How long could this take?

Answer 11

This could take several weeks

Question 12

What is liquidity?

Answer 12

Liquidity is:
1) The ability of an enterprise to pay its debts
2) The ability of an enterprise to convert its assets into cash

Question 13

Liquidity is the ability of an enterprise to pay its debts and the ability of an enterprise to convert its assets into cash.
An enterprise with good (positive) liquidity will …

Answer 13

An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors

Question 14

Liquidity is the ability of an enterprise to pay its debts and the ability of an enterprise to convert its assets into cash.
An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors. It means the enterprise is what?

Answer 14

It means the enterprise is solvent - can pay its debts

Question 15

Liquidity is the ability of an enterprise to pay its debts and the ability of an enterprise to convert its assets into cash.
An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors. It means the enterprise is solvent - can pay its debts.

An enterprise with poor (negative) liquidity …

Answer 15

An enterprise with poor (negative) liquidity may not be able to pay its debts

Question 16

Liquidity is the ability of an enterprise to pay its debts and the ability of an enterprise to convert its assets into cash.
An enterprise with good (positive) liquidity will have sufficient net current assets to pay its creditors. It means the enterprise is solvent - can pay its debts.

An enterprise with poor (negative) liquidity may not be able to pay its debts.
The enterprise may …?

Answer 16

The enterprise may:
1) Become insolvent
2) Have to cease trading

Question 17

Liquidity and cash:
If an enterprise needs to pay debts in the near future, such as what?

Answer 17

If an enterprise needs to pay debts in the near future, such as wages, heating and lighting

Question 18

Liquidity and cash:
If an enterprise needs to pay debts in the near future, such as wages, heating and lighting, it will need to have access to what?

Answer 18

If an enterprise needs to pay debts in the near future, such as wages, heating and lighting, it will need to have access to cash

Question 19

Liquidity and cash:
If an enterprise needs to pay debts in the near future, such as wages, heating and lighting, it will need to have access to cash.
Liquidity is the ability of an enterprise to pay its debts and the ability of an enterprise to convert its assets into cash.

For example, if a business has to pay its suppliers £5,000 in 10 days’ time but only has £2000 in cash, what could it do?

Answer 19

For example, if a business has to pay its suppliers £5,000 in 10 days’ time but only has £2000 in cash, it could:
1) Sell one of its fixed assets, such as a company vehicle it no longer requires
Or
2) Sell some of its inventory (stock) at reduced prices

Question 20

What is profitability?

Answer 20

Profitability is the ability of an enterprise to turn revenue into profit

Question 21

Profitability is the ability of an enterprise to turn revenue into profit.
What is this known as?

Answer 21

This is known as its profit margin

Question 22

Profitability is the ability of an enterprise to turn revenue into profit.
This is known as its profit margin.
What is the profit margin?

Answer 22

The profit margin is the amount of profit generated from each £1 generated in sales revenue

Question 23

Profitability is the ability of an enterprise to turn revenue into profit.
This is known as its profit margin.
The profit margin is the amount of profit generated from each £1 generated in sales revenue.
So, a profit margin of 20% means the enterprise is …

Answer 23

So, a profit margin of 20% means the enterprise is generating £0.20 from each £1 of sales revenue

Question 24

Profitability is the ability of an enterprise to turn revenue into profit.
This is known as its profit margin.
The profit margin is the amount of profit generated from each £1 generated in sales revenue.
So, a profit margin of 20% means the enterprise is generating £0.20 from each £1 of sales revenue.

The size of profit margin will vary.
What does a high profit margin mean?

Answer 24

A high profit margin means the enterprise will make a large profit

Question 25

Increasing profitability:
How can an enterprise increase its profitability?

Answer 25

An enterprise can increase its profitability by:
1) Raising prices without demand falling
Or
2) Lower its costs without a noticeable change to the product or service