Theme 2 Topic 13 - Liquidity

Question 1

Define Statement of Financial Position

Answer 1

Describes the finances of a company at a particular point in time, by comparing the items owned by the business with the amount it owes

Question 2

Define Assets

Answer 2

Items that are owned by a business

Question 3

Define Non-Current Assets

Answer 3

Items that can be used repeatedly in the production process that tend to last for more than one year

Question 4

Define Current Assets

Answer 4

Items that are used up in the production process and last less than one year

Question 5

What are three examples of non-current assets?

Answer 5

Buildings, Machinery, Vehicles

Question 6

What are three examples of current assets?

Answer 6

Inventory, Receivables, Cash

Question 7

Define Liabilities

Answer 7

Debts owed by the business

Question 8

Define Non-Current Liabilities

Answer 8

Debts due for repayment after more than one year

Question 9

Define Current Liabilities

Answer 9

Debts to be paid back within one year

Question 10

What is an example of a non-current liability?

Answer 10

Loan

Question 11

What are three examples of current liabilities?

Answer 11

Overdrafts, Corporation tax, Dividends

Question 12

Define Liquidity

Answer 12

The ability to convert an asset into cash without loss or delay

Question 13

What is the order of which assets are most liquid?

Answer 13

1st - Cash
2nd - Receivables
3rd - Stock

Question 14

Define Solvency

Answer 14

A measure of a firms ability to pay its debts on time

Question 15

A firm that CAN meet its financial commitments is…

Answer 15

Solvent

Question 16

A firm that CAN’T meet its financial commitments is…

Answer 16

Insolvent

Question 17

What are the two liquidity ratios?

Answer 17

Current Ratio and Acid Test Ratio

Question 18

Define Current Ratio

Answer 18

Measures the ability of a business to pay its liabilities (debts) over the next year or so

Question 19

Current Ratio =

Answer 19

Current Assets/Current Liabilities

Question 20

What is the ideal current ratio?

Answer 20

Between 1.5:1 and 2:1

Question 21

Define Acid Test Ratio

Answer 21

Ignores inventories in its calculation and therefore provides a more accurate indicator of liquidity than the current ratio

Question 22

Acid Test Ratio =

Answer 22

(Current Assets - Inventory)/Current Liabilities

Question 23

What is the ideal acid test ratio?

Answer 23

Between 0.75:1 and 1:1

Question 24

Define Working Capital

Answer 24

Finance available for the day to day running of the business

Question 25

What are three ways a business can manage its working capital?

Answer 25

Don’t give too much trade credit, Minimise stock levels, Take longer credit from suppliers

Question 26

What are three ways cash is important to a business?

Answer 26

Enables it to pay its bills, Take advantage of business opportunities, Allows growth and expansion in the long term