Measuring Liquidity

Question 1

Liquidity Ratio

Answer 1

Liquidity ratios measures how solvent a business is

This is how able it is to meet short-term debts

The two liquidity ratios are: Current Ratio & Liquid Capital Ratio

Question 2

Current Ratio

Answer 2

Current ratio shows the amount of current assets in relation to current liabilities

It is expressed as x : 1

If a firm had a current ratio of 2:1 it means for every £2 it owned in current assets it owed £1 in current liabilities

If a firm had a current ratio of 0.5:1 this means for every 50p it owned in current assets it owed £1 in current liabilities

Question 3

Liquid Capital Ratio

Answer 3

The liquid capital ratio is thought to be a tougher measure of a firm’s m

It shows the amount of current assets in relation to current liabilities but it does not include inventory

This is because inventory is the hardest current asset to turn into cash quickly

The result is expressed as x:1

Question 4

Liquid Capital Ratio Formula

Answer 4

Liquid Capital Ration = Current Assets - Inventory / Current Liabilities