1.35 Liquidity Flashcards
(20 cards)
What is liquidity?
The ability of a business to meet its short-term debts as they fall due.
What is the formula for the current ratio?
Current assets ÷ Current liabilities.
What is considered a healthy current ratio?
Between 1.5:1 and 2:1.
What does a current ratio below 1.5:1 indicate?
Potential liquidity issues – the business may struggle to pay short-term debts.
What is the formula for the acid test ratio?
(Current assets – inventories) ÷ Current liabilities.
Why is the acid test ratio more accurate than the current ratio?
It excludes inventories, which may be hard to quickly turn into cash.
What is a good acid test ratio?
Close to or above 1:1.
What does the statement of financial position show?
A snapshot of a company’s financial position, showing assets, liabilities, and capital.
What is the working capital formula?
Current assets – Current liabilities.
Why is working capital important?
It ensures a business can meet daily expenses like wages and bills.
Name two examples of current assets.
Cash and trade receivables.
Name two examples of current liabilities.
Trade payables and overdrafts.
What are non-current assets?
Long-term assets like buildings, machinery, and vehicles.
What are non-current liabilities?
Long-term debts like loans and mortgages.
Give two strategies to improve liquidity.
Reduce stock levels; delay supplier payments.
What is sale and leaseback?
Selling an asset and leasing it back to raise cash.
What are the risks of poor liquidity?
Inability to pay debts, leading to insolvency or business failure.
How did Euro Disney try to solve its liquidity problem?
Converted €600m of debt into equity and raised €420m in new shares.
What happened to Falcon Toys in 2014 regarding working capital?
Working capital was negative due to rising liabilities.
How can delaying non-essential purchases help liquidity?
It preserves cash for vital operations.
