2.3.2 Liquidity Flashcards
(23 cards)
whats working capital
amount of money that is used in day to day trading operations
how to calculate working capital
current assets - current liabilities
what are current assets
things a business owns that can be quickly turned into cash within a year (receivables)
what are current liabilities
businesses short term debts that need to be payed within a year (payables)
what is liquidity
how quickly you can get hold on your cash (if your liquid you can get your cash quickly)
whats a balance sheet/ statement of financial position
a financial statement that shows a company’s financial position at a specific point in time. it includes assets, liabilities and shareholders equity
assets = liabilities + equity
whats a non-current asset
long term asset that isn’t expected to be converted into cash within a year
land, machinery
intangible= trademarks
whats a non-current liability
long term obligation that are not expected to be settled within a year
whats an intangible asset
a non physical asset with long term value (eg. trademarks and copyrights)
whats a tangible asset
a physical asset that can be seen and touched (eg. cash, inventory )
what are borrowings
refers to the funds that a company or individual obtains from external sources such as banks
what are net assets
represents the residual value of a company’s assets after deducting its liabilities
what are ordinary shares
represents ownership in a company, the most common type of a share in a company
what’s share premium
additional amount of money that a company receives when it issues its shares at a higher price than normal value
what are accumulated losses
the total amount of losses a business has incurred over time
how to calculate current ratio
current assets / current liabilities
how to calculate acid test ratio
(current assets - inventories) / current liabilities
what does it mean if the ratio is less than 1:1 (acid test)
current assets do not cover its current liabilities, this could be a problem for the business
what does it mean if the ratio is 1.5:1 - 2:1 (current)
the business has plenty of working capital to meet its day to day bills
what does it mean if the ratio is above 2:1 (current)
then too much money is tied up in assets that are not making any money
what does it mean if the ratio is below 1.5:1
might be a problem but many retail stores operate at 1:1 as they have fast moving stocks and generate cash from sales
whats the difference between current ratio and acid test ratio
current ratio considers all current assets, while asset test ratio focuses on liquid assets
whats the ideal value for asset test ratio
1:1
