Liquidity - Balance Sheets

• What does a balance sheet show?

  What the business has spent money on
• What are non-current assets?

  Resources not easily converted to cash
• How long are non-current assets owned?

  More than one year
• What happens to non-current assets over time?

  They depreciate and lose value
• What are current assets?

  Assets expected to be sold within a year
• How long are current assets owned?

  Less than a year
• What are current liabilities?

  Debts to be paid within one year
• How long must current liabilities be paid back?

  Within 12 months
• What are non-current liabilities?

  Debts not due for at least 12 months
• How long does it take to repay non-current liabilities?

  More than 1 year
• What is the formula for equity?

  Assets - Liabilities
• If assets are $120,000$ and liabilities are $30,000$, what is equity?


  $90,000$
• What does the current ratio indicate?

  A business's ability to pay short-term debts
• What is the formula for the current ratio?

  Current Assets / Current Liabilities
• If current assets are $58m$ and current liabilities are $38m$, what is the current ratio?


  $1.53:1$
• What is a good current ratio?

  1.5-2:1
• What does a current ratio below 1:1 suggest?

  A liquidity or solvency problem
• What does an acid test ratio measure?

  A more accurate test of liquidity
• What does the acid test ratio exclude?

  Stock from current assets
• What is considered a satisfactory acid test ratio?

  1:1
• What does an acid test ratio below 1:1 indicate?

  Insufficient liquidity to pay off current liabilities
• What are profitability ratios?

  Measures of a business's profitability
• Name three types of profitability ratios.

  Gross profit margin, net profit margin, operating profit margin
• What is working capital?

  Money for day-to-day running costs
• What is the formula for working capital?

  Current assets - Current liabilities
• What are ways to improve liquidity?

  • Encourage cash sales
  • Destocking
  • Negotiate longer credit terms with suppliers
  • Delay payments
  • Use overdraft