Key Terms - Theme 2 (Liquidity) Flashcards
What is liquidity?
The availability of liquid assets to a market or a company
What is a Statement of financial position/balance sheet
A statement showing a business’ financial position at a certain point in time, providing a summary of its assets, liabilities and capital
What are assets?
The resources owned by a business
What are liabilities?
The debts of a business, what it owes to others
What is capital?
The money put into a business by owners as well as shareholders and investors
wealth in the form of money or other assets owned by a person or organization
Non-current assets
Long-term resources that are used frequently by a business (e.g. land, vehicles, machines, tools)
Current assets
Assets that are changed into cash within 12 months (easily turned to cash)
Current liabilities
Any money owed by a business that must be paid back within a year (e.g. loans, payables, trade, tax)
Non-current liabilities
Money owed by the business but doesn’t have to be paid back within a year (e.g. long-term bank loans, mortgages, company pension funds)
Net assets
Calculated by the value of of total liabilities from total assets. This will be equal to the shareholder’s equity (value of shares) at the bottom of the balance sheet
Shareholders’ equity
Provides a summary of what is owed to the owners of the business (e.g. share capital, retained earnings)
Current ratio calculation
Current ratio = current assets ➗current liabilities
What is current ratio
This is a liquidity ratio and focuses on the current liabilities and assets
Acid test ratio calculation
Acid test ratio = (Current assets - inventories) ➗ current liabilities
What is acid test ratio
A more severe test of liquidity. This is because inventories (stocks) aren’t closed as liquid resources. Stocks can become obsolete therefore are excluded when calculating the ratio.
