Chapter 5.4 Flashcards
(23 cards)
What is a statement of financial position?
It shows the value (worth) of a business at a specific time, usually end of the year.
What are the 4 main parts of a statement of financial position?
Non-current assets
Current assets
Non-current liabilities
Current liabilities
What is a current asset?
An asset used up within 12 months.
Examples of current assets?
Cash, inventory, accounts receivable (debtors).
What is a non-current asset?
A physical asset used for more than 1 year.
Examples of non-current assets?
Machinery, equipment, buildings, land.
What is a liability?
Money a business owes to others.
What is a current liability?
Money owed short-term (within a year).
Examples of current liabilities?
Overdraft, credit card bills, accounts payable (creditors).
What is a non-current liability?
Money owed long-term (over a year).
Examples of non-current liabilities?
Long-term bank loans, mortgages, debentures.
What is working capital?
Current assets − Current liabilities
Why is working capital important?
To pay for day-to-day expenses and avoid cash flow problems.
What does it mean if a business has more current assets than current liabilities?
It is solvent (can pay its debts).
What happens if a business has negative working capital for too long?
It may become insolvent (unable to pay debts).
What is liquidity?
The ability to turn assets into cash quickly.
Why is liquidity important? (Reason 1)
To pay day-to-day costs like wages and bills.
Why is liquidity important? (Reason 2)
To avoid closing down due to cash shortage.
What is the current ratio formula?
Current assets ÷ Current liabilities
What does a 2:1 current ratio mean?
The business can pay its debts twice with its assets.
What does a 3:1 current ratio mean?
The business can pay its debts three times with its assets.
Why is working capital important for businesses like BW Cleaning? (Reason 1)
To buy supplies and pay staff—if not, service quality drops.
Why is working capital important for businesses like BW Cleaning? (Reason 2)
To survive unexpected expenses and avoid insolvency.
