liquidity Flashcards
1
Q
Liquidity
A
- 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
2
Q
The balance sheet
A
- 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
3
Q
Why is it called a balance sheet
A
- balance assets and liabilities
4
Q
Non-current assets
A
- 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
5
Q
Current assets
A
- 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
6
Q
Non-current liabilities
A
- 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
7
Q
Current Liabilities
A
- debts expected to be paid within next year
- trade ad others payables
- borrowings are short term- loan and overdraft
- current tax liabilities - corporation tax
8
Q
Uses
A
- by shareholders for financial judgement
- to get a bank loan , investment
- evaluate performance
- summary valuation of the business
9
Q
Limitations
A
- Might be out of date quickly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
10
Q
Liquidity
A
- 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
11
Q
What does liquidity tell us about business
A
- 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
12
Q
Liquidity
A
Ability of business to pay debts
13
Q
The current ratio
A
Current assets/current liabilities
- simple measure that estimates whether the business can pay debts due within one year out of the current assets
14
Q
Working capital
A
Current assets- current liabilities
15
Q
Acid test ratio
A
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
16
Q
Improving liquidity
A
- 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
17
Q
Working capital
A
- 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
