Liquidity

Question 1

What are the three financial statements of a business?

Answer 1

• statement of comprehensive income
• statement of financial position
• cash flow statement

Question 2

What is the statement of finacial position?

Answer 2

snapshot of the businesses assets and its liabilities on a particular day ?

Question 3

What is the statement of comprehensive income?

Answer 3

measures a business’ performance over a given period. compares income of a business against costs and expenses

Question 4

What os tje cash flow statement?

Answer 4

• shows cash inflows and outflows and liquid funds over a certain time

Question 5

what are current assets?

Answer 5

items that the business ownes that are in the form of cash or can be easily turned into cash without major loss in value

Question 6

Examples of current assets?

Answer 6

cash, money owed by customers (recievables / debtors) and stock (inventory)

Question 7

what are non current assets?

Answer 7

considered long term where their full value wont be recognised until at yeast a year

Question 8

Examples of non current assets?

Answer 8

• land, property and various intangible assets

Question 9

WHat are intangible assets?

Answer 9

assets a business holds but not in the tangible form

Question 10

Examples of intangible assets?

Answer 10

goodwill, brand recognition, copyrights, paytents, trademarks

Question 11

What are current liabilities?

Answer 11

• debts owned by the business that are due to be paid in the next 12 months

Question 12

Examples of current liabilities?

Answer 12

trade creditors and overdrafts

Question 13

WHat are non current liabilities?

Answer 13

• financial obligations that are not due within a year

Question 14

Examples of non current liabilities?

Answer 14

loans and mortgages

Question 15

How do you calculate net current assets?

Answer 15

current assets - current liabilites

Question 16

How do you calculate net assets employed?

Answer 16

non- current assets + net current assets

Question 17

How do you calculate net capital employed?

Answer 17

• non current liabilities + total share holders equity

Question 18

WHat does liquidity asses?

Answer 18

whether a business has sufficient cash or equivalent current assets to be able to pay its shortterm debts as they fall due

Question 19

What ratios can be used to asses the liquidity?

Answer 19

current ratio, acid test ratio

Question 20

current ratio formula?

Answer 20

• current assets / current liabilities

Question 21

How do you calculate acid test ratio?

Answer 21

current assets - stock / current liabilities

Question 22

What is the acid test ratio?

Answer 22

doesnt take stock into account as not all stock will be sold/ turned to cash

Question 23

What does it mean if if current ratio is favourable and acid test ratio is unfavourable?

Answer 23

• lots of money is tied up in stocks

Question 24

What are the 6 most common cash flow problems?

Answer 24

• low profits/ losses
• too much production capacity ( spending too much on fixed assets)
• Excess inventories held (excess stocks tied up in cash )
• allowing customers too much credit ( late payments, not enough cash)
• overtrading ( expands too quickly)
• seasonal demand ( not having enough for times of low sales)

Question 25

What are the three key ways to managing cash flow?

Answer 25

• regular and reliable cash flow forecasting
• managing and working capital
• having sufficient and suitable sources of finance

Question 26

What are debtors?

Answer 26

amounts owed by customers

Question 27

WHat are creditors?

Answer 27

amounts owed to suppliers

Question 28

WHat is working capital>

Answer 28

amount of money a business has that is redily availbale for the day to day runnings of a business

Question 29

How can you improve cash flow from debtors?

Answer 29

• effective credit control (policies on credit, credit checking)
• could use debt factoring (sell debts to third party, generates cash)

Question 30

How can you improve cash flwo from creditors?

Answer 30

• trade credit

- delayed payments means business holds onto cash for longer

Question 31

• How do you improve cash flow from inventory?

Answer 31

• keep small balances
• computerise ordering to improve efficieny
• improve stock control