2.3.2 Liquidity Flashcards
1
Q
What is a fixed asset?
1
A
- Something the business owns and will own for 12+ months
2
Q
What is a current asset?
1
A
- Something the business owns and will own for less than 12 months
- ST
3
Q
What are receivables/trade receivables and an example?
1
A
- Cash we expect to receive within 12 months (trade credit)
4
Q
What are less current liabilities?
1
A
- Something business owns and has to pay back within 12 months
5
Q
What is a non-current liability?
1
A
- Something the business owes and has to pay back in more than 12 months
6
Q
How do you calculate current ratio?
1
A
- Current assets
Current liabilities = x:1
7
Q
What are the interpretations of current ratio?
4
A
- Accounts ideal = 1.5:1
- Large businesses = lower figure
- Too low = miss payments
- Too high = Keeping too much cash/holding too much stock
8
Q
How do you calculate acid test ratio?
1
A
- (Current assets - inventories) / current liabilities = x:1
9
Q
What are the interpretations of acid test ratio?
5
A
- Accounts ideal = 1:1
- Large businesses = lower figure
- Too low = miss payments (debt)
- Too high = keeping too much cash
- Big difference between current and acid = ^inventory (stock) lvls
10
Q
How do you calculate capital employed?
1
A
- Equity + non current liabilities
11
Q
How do you calculate gearing?
1
A
- Non current liabilities x 100
Capital employed
12
Q
What are the interpretations of gearing?
4
A
- 50%+ = highly geared (over reliant on borrowed money)
- ^Interest charges
- Bank may call in debts of companies if think they’ll fail
- Low% = Bad, not borrowing/investing enough into future
13
Q
How do you calculate ROCE?
1
A
- Operating profit
Capital employed x 100 = %
14
Q
What does ROCE show and what % is very satisfactory?
2
A
- Return on investment of shareholders funds and borrowing
- 20% (depends on economy)
15
Q
In what ways can you improve liquidity?
4
A
- Sell non used fixed assets
- ^Share capital
- ^LT borrowing (loans)
- Postpone planned investments
