Liquidity (2.3.2) Flashcards
What is Liquidity?
The ease in which assets can be turned into cash to pay bills within the next 12 months
What does Current Mean?
Short-Term (Next 12 Months)
What does Non-Current mean?
Long-Term (Over a year)
What is an asset?
Something the business owns (Cash, Machinery)
What is Liability?
A debt that needs to be paid by the business
What is a Current Asset? e.g.?
Asset that will be turned into cash in the next 12 months
e.g. Stock,Cash
What is a Non-Current Asset? e.g.?
Assets the business aims to keep in the long-run
e.g. Warehouse
What is Current Liability? e.g.?
Something the business owes in the next 12 months
e.g. Overdraft
What is Non-Current Liability? e.g.?
Something the business owes in over a year
e.g. Mortgage
What is Current Ratio?
Shows the ability of a business to meet their short-term debts
What is the equation for Current Ratio?
Current Assets/Current Liabilities (Divide)
What do each of the outcomes of Current Ratio mean?
Less than 1 = The firm cant pay its short-term debts
1.0=The firm can just about pay its short-term debts
1.2-2.0= The firm can comfortably pay its short-term debts
2.5+=The firm is potentially too liquid
What is the Acid Test Ratio?
Shows the ability of a business to meet their short-term debts without having to sell inventory
What is the equation for the Acid Test Ratio?
Current Assets-Inventory)/ Current Liabilities
What do each of the outcomes of the Acid Test Ratio mean?
Less than 1=The firm has to sell stock to pay short-term debts
1.0=the firm can just about pay its short-term debts without selling stock
1.5=The firm can comfortably pay its short-term debts without selling stock
2.0+=The firm is potentially too liquid
