liquity ratios

Question 1

what measures the liquidity of an enterprise?

Answer 1

The current ratio and the liquid capital ratio

Question 2

why must an enterprise’s current assets be greater than its current liabilities?

Answer 2

so that it is able to pay its bills

Question 3

paying liabilities:
what are current assets made up of?

Answer 3

both cash and inventory (stock).

Question 4

paying liabilities:
why will an enterprise have difficulty paying its liabilities?

Answer 4

if current assets are mainly in the form of inventory

Question 5

what are the two ratios calculated to understand the liquidity of an enterprise?

Answer 5

one which includes the inventory (stock) and another which excludes it

Question 6

how would an enterprise find information for the ratios extracted?

Answer 6

balance sheet

Question 7

liquidity ratios: current ratios
what is the current ratio?

Answer 7

the ratio of total current assets and llabilities

Question 8

liquidity ratios: current ratios
what does a current ratio include?

Answer 8

cash and inventory stock)

Question 9

liquidity ratios: current ratios
what is a current ratio a useful measure of?

Answer 9

the enterprises ability to pay its debts

Question 10

liquidity ratios: current ratios
why may the current ratio be misleading?

Answer 10

If current assets largely consist of Inventory

Question 11

liquidity ratios: liquid capital ratio
when will an enterprise need cash?

Answer 11

an enterprise needs to pay debts in the near future, such as wages

Question 12

liquidity ratios: liquid capital ratio
why is the liquid capital ratio a more accurate measure of the enterprise’s liquidity?

Answer 12

as it removes inventory (stock) from the calculation, since stock may be difficult to turn into cash quickly.

Question 13

liquidity ratios:
how do you calculate a current ratio?

Answer 13

current ratio = current assets / current liabilities

Question 14

liquidity ratios:
how do you calculate the liquid capital ratio?

Answer 14

liquid capital ratio = current assets - inventory / current liabilities

Question 15

interpreting current and liquid capital ratios:
what must current asssts be higher than?

Answer 15

current liabilities

Question 16

interpreting current and liquid capital ratios:
why will most enterprises accept the 2:1 for the current ratio?

Answer 16

as it includes inventory

Question 17

interpreting current and liquid capital ratios:
why will an enterprise struggle to pay it debts if either ratio falls below 1:1?

Answer 17

because it has insufficient cash

Question 18

interpreting current and liquid capital ratios:
what is advised to reduce and increase if ratio falls below 1:1?

Answer 18

reduce the quantity of its inventory
increase its cash levels