liquidity

Question 1

what is liquidity?

Answer 1

the ability of a business to meet its short term commitments with its available assets

Question 2

what happens to a business that cannot pay its bills?

Answer 2

usually fails rapidly even if they are profitable

Question 3

why is managing liquidity important?

Answer 3

it helps manage risk and enables them to prepare for the unexpected

Question 4

what does the statement of financial position show?

Answer 4

the financial structure of a business at a specific point in time

Question 5

what are the two things the statement of financial position show?

Answer 5

assets and liabilities whilst specifying the capital used to fund the business

Question 6

what is the statement of financial possession also known as?

Answer 6

the Balance Sheet

Question 7

what is a non-current asset?

Answer 7

items that are owned by a business for the long-term (e.g machinery and buildings)

Question 8

what is a current asset?

Answer 8

items that are converted to cash quickly - usually within 12 months (e.g cash and inventory)

Question 9

what are current liabilities?

Answer 9

money a business owes and is due to be settled soon - usually within 12 months (e.g trade payables and short-term borrowings)

Question 10

what are non-current liabilities?

Answer 10

money a business owes and that does not need to be paid back for at least 12 months e.g bank loans and mortgages

Question 11

how do you calculate the net assets?

Answer 11

assets - liabilities

Question 12

what does the Balance sheet show?

Answer 12

how the net assets of a business are funded

Question 13

what are net assets the same as?

Answer 13

capital employed

Question 14

what are the two ways to measure liquidity?

Answer 14

current ration and acid test ratio

Question 15

what is the current ratio?

Answer 15

a quick way to measure liquidity

Question 16

what is the current ratio expressed a?

Answer 16

a ratio E.g 0.1:1

Question 17

what type of business is the current ratio to most effective for when measuring liquidity?

Answer 17

those that hold little stock

Question 18

what does the result of the current ratio show?

Answer 18

how many £s of current assets it has available to cover each £1 of short term debt

Question 19

how do you calculate the current ratio?

Answer 19

current assets / current liabilities

Question 20

what is the acid test ratio?

Answer 20

a precise way to measure liquidity

Question 21

what is the acid test ratio also known as?

Answer 21

liquid capital ratio

Question 22

how is the acid test ratio calculated?

Answer 22

(current assets - inventory) / current liabilities

Question 23

how can you improve liquidity?

Answer 23

to manage the business better

Question 24

how can you manage a business better?

Answer 24

use a cashflow forecast to identify potential cash flow issue, budget effectively and set clear financial objectives

Question 25

what is a cashflow forecast?

Answer 25

a prediction of future cash inflows and outflows

Question 26

what is zero budgeting?

Answer 26

budgeting that starts with zero and then each item requested by a department has to be justified

Question 27

how does reducing the credit period offered by customers improve liquidity?

Answer 27

it will increase the level of current assets in the business

Question 28

how does asking suppliers for an extended repayment period improve liquidity?

Answer 28

current liabilities will not be reduced, the business can use cash it would have paid to suppliers for other purposes

Question 29

how can making use of an overdraft improve liquidity?

Answer 29

the business can spend the business can spend more money than it has in its bank account

Question 30

how can selling off excess tock improve liquidity?

Answer 30

less liquid current assets will be reduced and converted into more liquid forms of current assets (e.g cash)

Question 31

how can selling and leasing fixed assets improve liquidity?

Answer 31

the business will continue to have the use of assets but must make regular payments to the leasing company

Question 32

what is working capital?

Answer 32

the money that a business has to fund its day to day activities

Question 33

what is working capital often describes as on a balance sheet?

Answer 33

net current assets

Question 34

how do you calculate the working capital?

Answer 34

current assets - current liabilities

Question 35

what is the most liquid current asset?

Answer 35

cash