Liquidity

Question 1

Liquidity definition

Answer 1

The ability of a business to meet is short term commitments

Question 2

Statement of financial position (balance sheet)

Answer 2

Shows financial structure of business
- identifies assets and liabilities

Question 3

Current assets

Answer 3

Items that are quickly converted into cash
- cash
- receivables
- inventory

Question 4

Non- current assets

Answer 4

Items that are owned by a business for long term
- machinery
- buildings
- vehicles

Question 5

Current liabilities

Answer 5

Money a business owes and is due to be settled soon - within 12 months
- payables
- overdraft
- net current assets

Question 6

Non - current liabilities

Answer 6

Money a business owes and doesn’t not need to be paid soon
- mortgage
- bank loans

Question 7

Net assets calculation

Answer 7

Net assets= assets - liabilities

Question 8

Current ratio calculation

Answer 8

Current assets / current liabilities

Question 9

Acid test ratio calculation

Answer 9

Current assets - inventory / current liabilities

Question 10

Ways to improve liquidity

Answer 10

• reduce the credit period offered to customers
• ask suppliers for extended repayment period
• Sell off excess stock