Edexcel-Liquidity 2.3

Question 1

statement of financial position

Answer 1

Contains financial information required to draw conclusions about liquidity of business

Question 2

Liquidity

Answer 2

is the ability a business has to pay debts with sufficient cash or equivalent current assets as they fall.

Question 3

Current Assets

Answer 3

Items which are converted to cash quickly or are owed to a business.

Question 4

Liabilities

Answer 4

money a business owes

Question 5

Net assets

Answer 5

Assets- liabilities

Question 6

Ways to measure liquidity

Answer 6

Current ratio
Acid test ratio

Question 7

Current ratio formula

Answer 7

Current assets/ current liabilities

Question 8

acid test ratio formula

Answer 8

current assets- Inventory/ current liabilities

Question 9

Ways to reduce liquidity

Answer 9

Reduce credit period for customers
ask suppliers for extended payment options
sell assets

Question 10

working capital

Answer 10

money that a business has to fund day to day activities

Question 11

working capital formula

Answer 11

current assets-current liabilities

Question 12

manage working capital

Answer 12

short term borrowing
convert current assets into cash
requesting extensions on payments

Question 13

Too much working capital

Answer 13

extra storage costs
opportunity costs

Question 14

What is a high ratio?

Answer 14

Above 2.5

Question 15

What is a low ratio?

Answer 15

Below 1

Question 16

What does a high ratio indicate?

Answer 16

Too much working capital in inventories and debtors.

Question 17

What does a low ratio indicate?

Answer 17

Indicates possible liquidity problems