2.3.2 Liquidity Flashcards Preview

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Flashcards in 2.3.2 Liquidity Deck (27)
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1
Q

statement of financial position
(balance sheet)
2 things

A
  • net worth of a business (records assets/liabilities)

- raised capital & used capital

2
Q

two sides of a balance sheet

A

NET ASSETS:
(Non current assets + Current assets - Current liabilities- Non current liabilities)

TOTAL EQUITY
Share capital + Reserves (retained profit over years)

3
Q

net assets

A

must equal total equity (both figures must be balanced)

4
Q

non-current and current assets

A

NON-CURRENRT: own long time
e.g land, building, plant, property, equipment, machinery, goodwill/other tangibles (customer base) and brand name

CURRENT: (quick and easy to turn into cash)
e.g. cash balances/cash equivalent, trade debtors (receivables), inventories (stock), short term investment

5
Q

current and non-current liabilities

examples

A

CURRENT: debt must be paid within year
e.g. trade creditors (payables), overdraft, tax, ST loan

NON-CURRENT:
e.g long term borrowings/liabilities (loan/mortage)

6
Q

creditor and debtors

A

creditor = payables

debtor = receivables

7
Q

3 accounts

A

statement of comprehensive income (PAST)
statement of financial position (PRESENT)
cash flow forecast (FUTURE)

8
Q

net assets equation (also working capital)

A

non current assets + (current assets - current liabilities) - non current liabilities

9
Q

working capital (net current assets)

A

-net current assets
-day to day finance (funds to meet business needs)
-cash moving through cycle = enough for future
-measure of liquidity
current assets - current liabilities

10
Q

total equity

A

total amount of money invested in business from share capital and retained profit

share capital + retained profit

11
Q

least liquid current asset

A

in statement of financial position = inventories

liquid = turn to cash

-commenting on business liquidity position = look at net current assets

12
Q

goodwill

A

reputation for good quality included as good will in intangible assets

13
Q

equity capital

A

share capital and retained earnings

14
Q

interpreting statement of financial position

3 things

A
  • short term net current assets
  • each section
  • compare borrowed money with equity
15
Q

liquidity ratios

A

able to meet its short term liabilities & debts

  • business’ cash position (pay bills?)
  • making profit but unable to pay bills
  1. current ratio
  2. acid test
16
Q

current ratio

A

ability to meet debts over next year

current assets divided by current liabilities

ideal value 1.5:1
-varies on types of business
(fast food/banks = lower, deal in cash) (manufacture higher = lots of stock)

17
Q

acid test

A

very short term liquidity
-more accurate indicator
inventories = less liquid than cash

current assets - stock divided by current liabilities

ideal values 1:1 larger than 1 as trade mainly in cash.

18
Q

problems with liquidity

high and low

A
  • low = risk from insolvency

- high = X adv of possible inv opportunities

19
Q

if liquidity ratio is low?

A
  • hard to pay bills

- bring more cash into balance sheet

20
Q

measure of liquidity

A

ability to convert an asset into any form usually cash without any delay

21
Q

5 stages of liquidity cycle/working capital cycle

A
  1. capital injection
  2. produce goods
  3. sell to customers (credit or cash) (if credit = delay)
  4. customers pay (receivables) (delay if dont pay on time)
  5. buy materials (delayed if given trade credit)
22
Q

3 reasons why working capital is important to a business?

different businesses

A

1-day to day, machines/stock etc
2-pay wages/bills
3-long working capital cycle= incur costs (unpredictable)

  • small business: large firms delay = limited funds
  • expand business: expenditure = working capital
23
Q

5 causes of working capital problems

A

1-external/internal changes
2-high start costs,expansion/extra orders (quickly)
3-customers credit but supplier not giving credit
4-too much stock/failing to control levels
5-poor control of creditors and debtors

24
Q

6 ways to improve working capital

A

1-uncertainty
2-minimise fixed assets
3-minimise stock (effective management)
4-customer credit low much credit from suppliers (goods quicker = quicker payments)
5-cut production costs, sale &leaseback/ redundant asset
6-negotiate additional short term loans (financial planning)

25
Q

liquidity

A

ability of a business to find cash needed to pay bills

26
Q

working capital

A

current assets - current liabilities

27
Q

5 ways to improve liquidity

A
  1. sell under used fixed assets (sell and lease back)
  2. raise more share capital (cash)
  3. increase long term borrowings (reduce CL/loans)
  4. postpone planned investment
  5. reduce customer trade credit & increase own