liquidity Flashcards
what is liquidity?
the ability of a business to turn its assets into cash to pay its current liabilities
what are current assets?
assets owned for less than a year e.g. stock
what are fixed assets?
owned for more than a year e.g. vehicles or buildings
what is a debtor?
owes money to the business
what is a creditor?
money owed by the business
what is a current liability?
a short term debt that must be paid within a year e.g. creditors
what is a long term liability?
debts that are paid over a long period of time e.g. mortgage
what is the formula for equity?
assets-liabilities
What is a liquidity ratio for?
To assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts
What test could you do to test liquidity?
Acid test
What is the formula for acid test?
Cutest assets-inventory/
Current liabilities
What is insolvency?
Cannot pay short term debts
How can you improve liquidity?
- use overdraft
- encourage cash sales
- delay payments
