Liquidity

Question 1

What is Liquidity?

Answer 1

A businesses ability to pay short term debts

Question 2

How to work out Acid Test Ratio?

Answer 2

Current Assets - Inventories / Current Liabilities

Question 3

What is the equation for Current Ratio?

Answer 3

Current Assets / Current Liabilities

Question 4

What is the equation for Working Capital?

Answer 4

Current Assets - Current Liabilities

Question 5

High Liquidity LOA? (6)

Answer 5

1. High Liquidity (current ratio between 1.5-2 or acid test above 1)
2. High amounts of cash reserves
3. Therefore can keep up with supplier payments
4. Less likely to sell non current assets
5. Won’t interupt business operations
6. Leading to reduced risk of failure

Question 6

Low Liquidity LOA? (6)

Answer 6

1. Low Liquidity (Current ratio below 1 and acid test ratio below 0.75)
2. Low Cash reserves
3. Can’t keep up payments with suppliers
4. May be forced to sell non current assets
5. Interrupt business operations
6. Leading to high risk of failure