STUDY UNIT 1.2: LIQUIDITY

Question 1

Liquidity

Answer 1

firm’s ability to pay its current obligations as they come due.
Liquidity reflects the ease with which assets can be converted to cash

Question 2

Net Working Capital

Answer 2

Current Assets - Current Liabilities

reflects the resources the company would have to continue operating if the short run if it had to liquidate all of it’s current obligations at once.

Question 3

Current Ratio

Answer 3

Current Assets/Current Liabilities

• most common measure of Liquidity
• low ratio indicates a possible solvency problem
• high ratio indicates management may not be investing idle assets productively
• Quality of AR & Inventory should be considered before evaluating the current ratio
• Current ratio should be proportional to the operating cycle (Grocery store)

Question 4

quick (acid-test) ratio

Answer 4

(Cash + Marketable securities + Net Receivables) /Current Liabilities

Question 5

Cash Ratio

Answer 5

(Cash + Marketable securities)/Current Liabilities

Question 6

Cash flow Ratio

Answer 6

Cash flow from operations/Current Liabilities

Question 7

Net Working Capital Ratio

Answer 7

(Current Assets - Current Liabilities)/Total Assets

*most conservative of the working capital ratios

Question 8

Liquidity of current Liabilities

Answer 8

Ease with which a firm can issue new debt or raise new structured funds.

Ability is based on

• Size
• reputation
• Creditworthiness
• capital levels