Liquidity Flashcards
What is liquidity?
Ability of a business to find the cash it needs to pay the bills
Statement of financial position
Balanced sheet that shows what the business owns,as well as what it owes and where it gets its money from
What is a current asset and examples
Asset that is quick and easy to turn into cash
E.g cash or inventory
What is current liability and examples
Debt that must be paid within a year
E.g bank overdrafts, income taxes
Current ratio formula
Current assets / current liabilities
Ideal ratio for current ratio formula
1.5:1
What does current ratio measure?
Simple judgement to be made about the firms liquidity
Formula for acid test ratio
(Total current assets - inventories) / current liabilities
Ideal ratio for acid test ratio formula
1:1
Why does acid test ratio exclude stock?
Doesn’t include stock as its dome to determine the company’s ability to meet short term obligation with its most liquid assets
What are fixed or non current assets and examples
Company’s long term investments where the full value will not be realised within the accounting year
E.g tangible fixed assets (equipment), intangible (patents)
4 ways to improve liquidity
- selling underused fixed assets (equipment or machinery)
- raising more share capital
- increasing long term borrowing through loans
- postponing planned investments
Importance of liquidity
Having liquid assets allows you to get to them quickly and use them easily
What is working capital cycle?
Convert its net current assets and current liabilities into cash
Formula for working capital
Current assets - current liabilities
