liquidity

Question 1

Liquidity

Answer 1

• when a business does not have the cash flow to meet their immediate debts, we refer to this as liquidity
• business measures their liquidity to understand how secure business is

Question 2

The balance sheet

Answer 2

• document showing what business owns e.g assets
• snapshot of what business worth at particular time
• used by shareholders, lenders and suppliers to judge financial position
• shows source of funds - where they get figures from- can’t disappear
• statements of financial position
• plc and ltd required by law to publish - sole traders and partnerships can draw up a balance sheet

Question 3

Why is it called a balance sheet

Answer 3

• balance assets and liabilities

Question 4

Non-current assets

Answer 4

• long term assets-not sold within the next year
• intangible assets - copyright, trademarks - can’t touch
• tangible assets- property
• deferred tax assets- payment of taxes

Question 5

Current assets

Answer 5

• cash
• short term assets of the business - likely to be turned into cash in year
  -inventories - stock of raw materials
• trade + other receivables- race debtors own money

Question 6

Non-current liabilities

Answer 6

• debts which are not expected to be paid in next year
• borrowings- long term - over 1 yr loans
• retirement benefit obligations- money owed to past employees
• often non- current liabilities- pay for repairs to machines

Question 7

Current Liabilities

Answer 7

• debts expected to be paid within next year
• trade ad others payables
• borrowings are short term- loan and overdraft
• current tax liabilities - corporation tax

Question 8

Uses

Answer 8

• by shareholders for financial judgement
• to get a bank loan , investment
• evaluate performance
• summary valuation of the business

Question 9

Limitations

Answer 9

• Might be out of date quickly
• value of assets may not be value they sell for
• in tangible may include goodwill- hard to put value on - brand name
• static snapshot of one day, next day may change

Question 10

Liquidity

Answer 10

• ability of business to Tuen its assets into cash
  Least liquid assets are listed at top- premises and special machinery - may take a while to sell
• cash most liquid asset of all

Question 11

What does liquidity tell us about business

Answer 11

• indicates to investor the ability of a business to pay its debts
• creditors - invested in liquidity of business - see if they are owed
• banks and investors- see if enough to pay debt
• call current and acid test ratio

Question 12

Liquidity

Answer 12

Ability of business to pay debts

Question 13

The current ratio

Answer 13

Current assets/current liabilities
- simple measure that estimates whether the business can pay debts due within one year out of the current assets

Question 14

Working capital

Answer 14

Current assets- current liabilities

Question 15

Acid test ratio

Answer 15

Current assets-stock/current liabilities
- another important and widely used liquidity ratio, particularly in industries where it is traditional to carry a large value of stocks in working capital

Question 16

Improving liquidity

Answer 16

• sell assets to pay short term debts
• have less stock that business holds so dispatch faster to customers
• reduce credit periods to customers
• can pay suppliers later on than credit agreement
  0 increase borrowing on long term to help clear short term debts

Question 17

Working capital

Answer 17

• current assets - current liabilities
• very low would indicate business in trouble and issue paying expenses
• sometimes a time lag between customers paying for good s and supplier wanting payment that isn’t in favour for business
• can cause a shortage of working capital