Chapter 6 Flashcards
What is liquidity?
The level of ease with which assets can be turned into cash
Examples of liquid assets
- Cash
- Short-term investments (i.e stocks)
- Accounts Receivables
- Fixed-term deposits
Definition of liquid assets
current assets less inventories
The three motives for holding cash
- Operational - to conduct business
- Precautionary - to deal with unforeseen circumstances
- Opportunities - to capitalise on investment opportunities
Working Capital formula
current assets - current liabilities
Another name for working capital cycle
Cash operating cycle
Three objectives of cash management
- Profitability
- Liquidity
- Security
Return on shareholder’s funds formula
(profit after tax / total equity) x 100%
What are the two Liquidity ratios
- Current ratio: Current assets / current liabilities
- Acid test ratio: (current assets - inventory) / current liabilities
Over-trading definition
When a business uses its working capital up in the short-term but the returns do not turn into cash quick enough
Over-capitalisation definition
When a business has more capital/funds than it can effectively utilise and turn into profit.
When a business’ current assets are too large, causing issues. I.e. Having too large AR causing in lots of bad debts
The two main factors that cause stringent governance in a corporate company
- Government legislation
- Restrictions from being a stock-listed company
Fiduciary duty definition
A duty of care and trust which one person/entity owes to another
Who has a fiduciary duty to an entire company?
The directors. They must act according to the interests of the entire company and not just one biased side.
UK Nolan Committee on Standards in Public Life (1995)
states that holders of public office must subject themselves to whatever scrutiny their office post requires
