2.1.3 liability Flashcards
(14 cards)
what is limited liability?
Limited liability is where a business owner is only liable for their initial investment and the business owner and the business are legal separate entities.
what is unlimited liability?
This is when there is no separate identities between the business and the owner and that they are liable to ore then just their initial investment.
what are some implications for limited liability?
- the owner can have separate assets
- the owner and the business have differing legal identities
- there can be several shareholders within the business
- owner has protection over there own personal goods
what are some implications of unlimited liability?
- they are unable to sell shares of the business
- the owner and the business are together
what are some examples of finances for unlimited liability?
- private investors
- credit cards
- overdrafts
- crowd funding
- trade credit
what are some examples of finance for limited liability?
retained profit
- sale of assets
- trade credit
- venture capital
- government grants
define liquidity?
liquidity is the ease and cost of assets can be turned into cash and used immediately as a means of exchange
what is liquidity ratio?
This is seeing whether a business has sufficient cash or current assets to be able to pay its debts as they are due.
how do you find current ratio?
current ratio = current assets
————————-
current liabilities
how do you interpret these results?
Ratio of 1.5-2.0 would suggest efficient management of working capital
if its less then 1.0 it indicates cash problems
how do you do acid test ratio?
current liabilities
how do you interpret acid test ratio?
It serves as a warning sign for businesses that usually hold stocks
- less relevant for businesses with high stock turnover
- less then 1 would indicate a problem
how do you find gearing ratio?
long term liabilities
—————————— x100
capital employed
how do you interpret these results?
- focusses on long term financial stability of a business
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