2.3.2 liquidity flash cards

• What is the statement of financial position (balance sheet)?


  A document which provides a summary of a business's assets, liabilities and capital
• What are assets?

  Resources owned by a business e.g buildings, machinery, equipment
• What are liabilities?

  Debts of a business
• What is capital?

  The money put into the business by the owners along with other sources of finance it is used to buy assets
• Formula for Assets:

  Capital + Liabilities
• What are non-current assets?

  Long term resources that would be used repeatedly by the business over a period of time, and can include intangible assets
• Examples of non-current assets:

  - Land

  - Property

  - Equipment
• Examples of intangible assets:


  - Customer Lists

  - Trademark of their brand name

  - Brand names
• What are current assets?

  Assets which will be changed to cash within 12 months e.g inventory, receivables
• What are current liabilities?

  Any money owed by a business that must be repaid within one year e.g loans, tax liabilities
• What are non current liabilities?

  Long-term loans and any money owed which would take more than 1 year to repay e.g long-term bank loans, mortgages
• What are net assets?

  Calculated by doing Total assets - Total liabilities
• What is shareholders' equity?

  Provides a summary of what is owed to the owners of the business e.g share capital, retained profit
• How is liquidity measured?

  Through information on a balance sheet
• What does liquidity measure?

  The business's ability to pay off its short term debts with its liquid resources
• Formula for current ratio:

  current assets - current liabilities
• Formula for acid test ratio:

  (current assets - inventory)/ Current Liabilities
• What is considered a sufficient current ratio?

  1.5 to 2
• What can you argue if a business has a current ratio below 1.5?

  It has an insufficient amount of working capital
• Why may some businesses have a current ratio below 1?

  As they may have fast-selling stock and generate cash from sales
• What sort of businesses may have a current ratio of below 1?

  Retailers and supermarkets
• Why may a business have a current ratio above 2?

  It may have too much money tied up to the business and the money is being unproductive
• Example of what money may be put into if a business has a current ratio above 2:

  Money may be tied of in stocks and not make any returns
• What is the acid test ratio?


  Measures liquidity but the business's stock is not counted as a current asset
• Why does not including inventory make measuring liquidity more accurate?

  There is no guarantee
• What does it mean if you have an acid test ratio of less than 1?

  You don't have enough current assets to pay for your current liabilities
• Advantages and disadvantages of using overdraft facilities:

  - Can help increase the inflow of the business

  
  

  - Can only borrow up to its overdraft limit

  - No guarantee it can pay back its overdraft, and banks will be hesitant to lend
• Advantages and disadvantages of additional long/short term loans:

  - Flexible - Can decide how much they want to pay back per month to help cashflow

  
  

  - Lenders can be hesitant to lend if they know the business is short of cash in fear of the business collapsing