liquidity

Question 1

what is liquidity?

Answer 1

liquidity measures the ability of a firm to find the cash to pay its bills.
- the cash needs to be available in a current bank account or close to being available

Question 2

what are current liabilities?

Answer 2

bills that need to be paid in the next 12 months

Question 3

current ratio

Answer 3

current assets ÷ current liabilities

Question 4

Acid test ratio

Answer 4

(current assets - inventories) ÷ current liabilities

Question 5

5 ways to improve liquidity:

Answer 5

1. selling underused fixed assets
2. raising more share capital
3. increasing long term borrowing
4. postponing planned investments
5. improving the management of working capital

Question 6

what does a limited company need to send every year?

Answer 6

a balance sheet

Question 7

what is a balance sheet? who is it important for? what does it contain?

Answer 7

• shows an organisation’s assets and liabilities on the last day of the year
• how much they own and what they owe
• shows the wealth, in wealth and indebtedness of the business
• vital information for shareholders, managers, finances, suppliers

Question 8

what do the results of an acid test or current ratio mean?

Answer 8

1.2 - 2 is efficent

below 1 suggests cash problems

higher ratio - organisation is criticised for having too many resources tied up in unproductive assets

Question 9

Current ratio = current assets : current liabilities

Answer 9

1:1

Question 10

why is it good that the acid test ratio includes stock?

Answer 10

• stock is the most illiquid current asset
• hardest to turn into cash without a loss in its value
• takes a long time to convert stock into cash
• stock may be old or obsolete and therefore unsellable