Liquidity

Question 1

What is liquidity

Answer 1

The ability of a business to turn its assets into cash to pay its current liabilities

Question 2

Liquidity- turning assets into cash

Answer 2

• The ability of a business to turn its assets into cash
• The least liquid assets are listed at the top of the statement of financial position (balance sheet) – premises and specialist machinery for example may take a while to sell, while stock is easy to sell on

Question 3

Definition of statement of financial position

Answer 3

A PLC (Public Limited Company) or a LTD (Private Limited Company) business have to publish their accounts by UK law
• One of these accounts is the statement of financial position. In older text books and on the Internet you may also see it called the balance sheet

Question 4

Measuring liquidity

Answer 4

A business owner and their investors can use liquidity as a measure of how healthy the business is, this it doesn’t have too many debts and that it can easily pay its bills

Question 5

Current ration formula

Answer 5

Current assets ______________
Current liabilities

Question 6

Acid test ratio formula

Answer 6

Current assets - inventory
_______________
Current liabilities

Question 7

Ways that liquidity can be improved

Answer 7

• A business could reduce the amount of stocks that it holds, so finished goods need to be dispatched faster to customers
• A business could reduce the credit period offered to customers, for example insist that customers pay in 30 days not 90

Question 8

What is working capital

Answer 8

Working capital means the day-to-day finance needed in a business and can be calculated by CA-CL

Question 9

What are fixed assets

Answer 9

They are the assets that the business buy in order to use them in the business