UNIT 7 - Current Ratio Flashcards
what type of ratio
liquidity
what does it measure
how liquid compay is
formula
current assets/current liabilities
where can we find things needed for formula
Balance sheet q
Example of CA
DEBTORS , STOCK , CASH
Examples of CL
Overdrafts
creditors
if myc urrent ratio is 2 how would i write it
2:1
what does current ratio of 2:1 mean
for every £2 of current assets you have £1 of current liabilities
what is benchmark ratio and what is the range
2
1.5-2.5
benchmark and ratio depend on and give example
industry for example insurance companies would have high ca:cl as get large sums of monthly repayments
ratio of 2:1 suggests
good liquidty
good working capital mangment
why does 2 show good liquidty
have enough current assets to cover current liabilities twice
why does 2 show good working capital management
because wanna make sure got more current assets than current liabilities
there comes a pint when current ratio is too much as…
as only certain amount of times you should be able to cover current liabilities, don’t need it to be 10 times
give example of high current ratio
10:1
what is important to consider about high ratios
not as …
bad as low numbers but can still be a problem
what is the reason for high current ratio
high debtors, cash , stock
to reduce our high current ratio what can we do about debtors
chase up debts quicker
maybe use debt factoring but could damage reputaiont with customers but depdns is this a repeat service bs
e.g
to reduce high curent ratio what can we do about cash /consider
we can be employing it instead of just eltting it sit there for example use it for a team building day to boost morale
to reduce high curent ratio what can we do about stock
putting on sales/reduce prices to prevent obsoletion and release cash held up in stock that can be employed or used for investment into R&D for diversification to protect a bs from changes and vulnerablities int heir own segments
how does high current ratio show ood liquidity
shows able to cover CL
Why does high current ratio show poor wc managment
could be doing something better with current assets i.e investing elsewhere
give exaxmple of low current ratio
0.5:1
why is 0.5 a worse case scenraio of current rati
less than 1
