Theme 2 Topic 13 - Liquidity Flashcards
Define Statement of Financial Position
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
Define Assets
Items that are owned by a business
Define Non-Current Assets
Items that can be used repeatedly in the production process that tend to last for more than one year
Define Current Assets
Items that are used up in the production process and last less than one year
What are three examples of non-current assets?
Buildings, Machinery, Vehicles
What are three examples of current assets?
Inventory, Receivables, Cash
Define Liabilities
Debts owed by the business
Define Non-Current Liabilities
Debts due for repayment after more than one year
Define Current Liabilities
Debts to be paid back within one year
What is an example of a non-current liability?
Loan
What are three examples of current liabilities?
Overdrafts, Corporation tax, Dividends
Define Liquidity
The ability to convert an asset into cash without loss or delay
What is the order of which assets are most liquid?
1st - Cash
2nd - Receivables
3rd - Stock
Define Solvency
A measure of a firms ability to pay its debts on time
A firm that CAN meet its financial commitments is…
Solvent
A firm that CAN’T meet its financial commitments is…
Insolvent
What are the two liquidity ratios?
Current Ratio and Acid Test Ratio
Define Current Ratio
Measures the ability of a business to pay its liabilities (debts) over the next year or so
Current Ratio =
Current Assets/Current Liabilities
What is the ideal current ratio?
Between 1.5:1 and 2:1
Define Acid Test Ratio
Ignores inventories in its calculation and therefore provides a more accurate indicator of liquidity than the current ratio
Acid Test Ratio =
(Current Assets - Inventory)/Current Liabilities
What is the ideal acid test ratio?
Between 0.75:1 and 1:1
Define Working Capital
Finance available for the day to day running of the business
What are three ways a business can manage its working capital?
Don’t give too much trade credit, Minimise stock levels, Take longer credit from suppliers
What are three ways cash is important to a business?
Enables it to pay its bills, Take advantage of business opportunities, Allows growth and expansion in the long term
