Liquidity

Question 1

Income statement

Answer 1

• Measures the businesses performance over a time period, usually one year
  Compares income of the business against the costs of goods and services.

Question 2

Statement of financial position

Answer 2

• Snapshot of the businesses assets and liabilities on a single day
• Usually last day of the year

Question 3

Cash flow statement

Answer 3

Shows how the business has generated and disposed of cash and liquid funds during the period under review.

Question 4

Liquidity ratios

Answer 4

Used to assess whether a business has sufficient cash or equivalent current assets to pay of its debt as it falls due.

Question 5

Interpreting the ratio

Answer 5

• Ratio of 1.5-2.0 would suggest efficient management of working capital
• Low ratio lower than 1 indicates cash problems
• If the ratio is high it could infer too much working capital

Question 6

Evaluating acid test ratio

Answer 6

• Significantly less than 1 bad news

- Less relevant for a business with high stock turnover

Question 7

Main causes of cash flow problems

Answer 7

• Low profits or worse losses
• Excess inventories held
• Too much production capacity
• Overtrading- Business growing too fast

Question 8

Debt factoring

Answer 8

• The selling of debtors to a 3rd part
• Generates cash
• Will reduce income and profit margin on sales