Topic 18 Flashcards
What does Liquidity mean?
This is how easily a firm can turn assets into cash without loss and refers to a firms ability to pay day to day expenses and short term debts
Give the definition of Liquidity Ratios
This will measure the firms ability to pay short term debts and expenses
What is Inventory Turnover
It shows how quickly on average, the firm is selling of its goods
Sate the 2 equations you can use to express Inventory Turnover and what the figure represents
1) Cost of Sales / Avg Inv = Times per annum
(Higher the figure = Business selling goods quickly)
2) Average Inv / Cost of sales x 365 = days
(Lower the figure = shows business selling goods quickly)
RECAP Q: How do you calculate Average Inventory?
Opening + Closing Inv / 2
State 2 disadvantages for holding Inventories for too long
1) It is costly and inefficient
2) It can lead to cash flow problems
What are the 2 ratios used to measure liquidity using C.A / C.L
- Current Ratio
- Liquid Capital ratio
How do you calculate Current Ratio
Current Assets / Current Liabilities
How do you calculate Liquid Capital Ratio
Current Assets - Closing Inv / Current Liabilities
Suggest a way in which a business can maintain steady cash flow
Make sure its trade receivable days are shorter than trade payable days
How do you calculate Trade Receivable days
Trade Receivables / Credit Sales x 365
How do you calculate Trade Payable Days
Trade Payables / Credit Purchases x 365
What is Credit Control?
This involves the monitoring of the Sales Ledger and Purchase Ledger to make sure Customers pay and suppliers are paid on time
State 3 disadvantages of delaying payments to suppliers
- Loss of Cash discount for early settlement
- Refusal to supply on Credit
- Possible Court Action
What is Financial Accounting?
Recording of financial info and using to produce financial statement. It is historic and looks at past info
