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
