Balance Sheet & Liquidity

Question 1

What is a Balance Sheet?

Answer 1

A legally required financial document that summarises the net worth of a business

Question 2

What is within a balance sheet?

Answer 2

assets and liabilities

Question 3

What does the balance sheet show a business?

Answer 3

the way the business has raised its capital and uses of it

Question 4

What are assets?

Answer 4

things a business owns

Question 5

What are liabilities?

Answer 5

things a business owes

Question 6

What is the structure of a balance sheet?

Answer 6

Non current assets (Fixed assets)
Current assets
Current liabilities
Working capital
Non current liabilities
Net assets
Financed by
Total equity

Question 7

What are non current assets?

Examples?

Answer 7

also known as fixed assets
things a business owns for more than a year
equipment, land

Question 8

What are current assets?

examples?

Answer 8

things a business owns for less than a year that can be quickly converted into cash
stock, debtors, cash, trade credit

Question 9

What are current liabilities?

examples?

Answer 9

Things a business owe less than 1 year

creditors, tax, wages

Question 10

What is working capital?

Answer 10

current assets - current liabilities

this is the day-to-day wealth inside the business and how much cash is within the business during an average day

Question 11

What are non current liabilities?

examples?

Answer 11

things a business owes in more than 1 year

loan, mortgage

Question 12

What are net assets?

Answer 12

(Fixed Assets (non current assets) + working capital) - non current liabilities

Question 13

What is financed by?

Answer 13

Shares

Reserves (net profit)

Question 14

What is total equity?

Answer 14

the total of all financed by

Question 15

What is an intangible asset?

Answer 15

An intangible asset is an asset that lacks physical substance and usually is very hard to evaluate

Question 16

What need to equal in order for a balance sheet to be correct?

Answer 16

total equity and net assets

Question 17

What is a balance sheet used to do?

Answer 17

to assess liquidity

Question 18

What is liquidity?

Answer 18

the ability to pay short-term debts

Question 19

What are two methods of measuring liquidity?

Answer 19

current ratio

acid-test ratio

Question 20

What is a current ratio?
ideal?
acceptable?

Answer 20

current assets / current liabilities

2: 1
1. 5:1

Question 21

What is the acid-test ratio?
ideal?
acceptable?

Answer 21

current assets - stock / current liabilities

1: 1
0. 8:1

Question 22

What does it mean if the ratios are below the ideal and acceptable levels?

Answer 22

than the business cant pay back short-term debts and may suffer from quick demands and may suffer from insolvency

Question 23

What does it mean if the ratios are too high?

Answer 23

the company possibly has too much capital invested into stocks and they are not taking advantage of opportunities.

Question 24

What is the difference between the acid-test ratio and the current ratio?

Answer 24

the acid-test ratio tests if you could pay back short-term debts if you had no stock
But this may be inaccurate for businesses that primarily have most in stocks ie Sainsburys

Question 25

How would a business improve liquidity ratios?

Answer 25

raising cash
selling non-current assets
agree long term borrowing
reduce short term borrowing