P2- Hw 11 Liquidity Flashcards
Statement of financial position
Summary of the businesses finance showing their assets and liabilities
Liquidity
How easily a business can turn assets into cash
Current ratio
Shows a businesses ability to meet debts over the next year
Current ratio formula
Current ratio = current assets
————————
Current liabilities
Acid test ratio
Measures short term liquidity
Acid test ratio formula
current assets - stock
Acid test= ——————————
Current liabilities
Working capital
The day to day finance used in the business
(Aka net current assets)
Net current assets
The current assets — current liabilities
Capital employed
The total amount of capital used for the acquisition of profits by a business
Total equity
The value left in a company after subtracting the total liabilities from total assets
Cash vs profit
Cash- source of finance that can be easily accessed to pay for suppliers etc
Profit- the total capital left after costs have been taken away from sales revenue
Current asset
Something a business owns that can be turned into cash in less than a year
E.g. inventory/stock and cash
Current liability
Something the business owes that must be payed back within a year
W.g. Overdraft and trade credit
What is the ideal value for current ratio
1.5-2
• varies on type of business (fast food and banks have lower ratios but manufacturing have higher ratios)
Ideal value for acid test
0.75-1
• some businesses can operate lower than 1 as they trade mainly in cash
