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Flashcards in Liquidity Deck (16)
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1
Q

What is liquidity?

A

Ability of a business to find the cash it needs to pay the bills

2
Q

Statement of financial position

A

Balanced sheet that shows what the business owns,as well as what it owes and where it gets its money from

3
Q

What is a current asset and examples

A

Asset that is quick and easy to turn into cash

E.g cash or inventory

4
Q

What is current liability and examples

A

Debt that must be paid within a year

E.g bank overdrafts, income taxes

5
Q

Current ratio formula

A

Current assets / current liabilities

6
Q

Ideal ratio for current ratio formula

A

1.5:1

7
Q

What does current ratio measure?

A

Simple judgement to be made about the firms liquidity

8
Q

Formula for acid test ratio

A

(Total current assets - inventories) / current liabilities

9
Q

Ideal ratio for acid test ratio formula

A

1:1

10
Q

Why does acid test ratio exclude stock?

A

Doesn’t include stock as its dome to determine the company’s ability to meet short term obligation with its most liquid assets

11
Q

What are fixed or non current assets and examples

A

Company’s long term investments where the full value will not be realised within the accounting year
E.g tangible fixed assets (equipment), intangible (patents)

12
Q

4 ways to improve liquidity

A
  • selling underused fixed assets (equipment or machinery)
  • raising more share capital
  • increasing long term borrowing through loans
  • postponing planned investments
13
Q

Importance of liquidity

A

Having liquid assets allows you to get to them quickly and use them easily

14
Q

What is working capital cycle?

A

Convert its net current assets and current liabilities into cash

15
Q

Formula for working capital

A

Current assets - current liabilities

16
Q

Importance of working capital

A

Daily necessity as businesses require a regular amount of cash to make routine payments, cover unexpected costs, purchase basic materials