Liquidity 2.3.2 Flashcards
What is a statement of financial position (balance sheet)?
Financial document that summarises the net worth of a business at a given point in time.
What are non current assets?
Likely to be kept by a business for more than one year
* vehicles
* premises
* machinery
What are current assets?
Likely to be turned into cash within a year
* inventories
* debtors
* cash
What are assets?
Items of value owned by a business.
What are liabilities?
Money a business owes.
What are non current liabilities?
Debts a business has more than one year to repay
* bank loans
What are current liabilities?
Debts a business must repay within a year
* overdrafts
* creditors
What does the second half of a statement show?
How net worth has been financed.
What is liquidity?
Liquidity is a company’s ability to raise cash when it needs it. There are two major determinants of a company’s liquidity position. The first is its ability to convert assets to cash to pay its current liabilities (short-term liquidity). The second is its debt capacity
How can liquidity be measured?
- current ratio
- acid test ratio
What is current ratio?
Current assets : Current liabilities
What is acid test ratio?
Current assets - stock / current liabilities
Why is inventory not included in current assets?
Deemed the hardest to turn into cash quickly
When will a business with low liquidity be in danger?
If short term creditors demand payment quickly
How can a business improve liquidity?
- Sell unproductive assets.
- Monitor debtors.
- Long-term sources of finance.
- Move cash balances from current accounts to high.
- Cutting back on certain costs
