Profit And Loss Account and liquidity calculations Flashcards
define working capital
Working capital - the money used for the day to day running of the business
How do you work out working capital from the profit and loss account
Working capital = current assets - current liabilities
What is the equation for current ratio
- Current ratio = current assets / current liabilities
2. = ANS:1
What does the answer from the current ratio equation mean
ANS:1 = for every £1 you owe you own the ANS
What is the ideal ratio range for current ratio results
1.5:1 - 2:1 as it shows efficient management of working capital
What’s the issue with ratios too high or too low in the current ratio answers
- Too high = too much working capital
2. Too low = cash problems
What is the equation for the asset test ratio
- Asset test ratio = (current assets - stock) / current liabilities
- = ANS:1
What does the answer convey from the asset ratio test
A sigh on how liquid your assets are. Significantly less than 1:1 is bad news
What is the equation for the debter collection period
DCP = (debters / turnover) x 365
What does the answer from the debters collection period convey
The lower the answer the sooner you get paid
What is the equation for creditor days
CD = (trade payables / cost of sales) x 365
What does the answer of trade payables convey
ANS = how many days it takes you to pay your liabilities
What is the formula for the gearing ratio
- Gearing % = loans / (loans + shares + profits)
2. ANS x 100
What does the gearing test show
The % of an investment you owe compared to what you own
What is an answer >50% on the gearing test said to be
Highly geared
What is the formula intrest cover
Intrest cover = profit before tax and intrest / intrest
What does the value of the intrest cover test show
The value shows you how many times you can pay the value of intrest
What are the names of the 4 liquidity ration you need to know
- Asset test ratio
- Current ratio
- Debters collection (days)
- Creditor payment (days)
