(PAPER 2) 2.3.2 Liquidity Flashcards
Liquidity definition
What the business owns and owes on one given day
Non-Current assets definition
Items of value owned by the business that are likely to be kept for more than one year
Current assets definition
Items owned by the business whos value varies as a result of daily business activities
Current liabilities definition
Debts that the business has less than one year to repay
non-current liabilities definition
trade and other payable borrowings.
working capital= current assets-current liabilities
(a positive number is non current assets-not liabilities)
Net current assets
Current assets - current liabilities
Net assets definition
Total assets (what the business owns) - total liabilities (what the business owes)
Total equity definition
The total amount of money being used in the business from share capital and retained profit
Non current assets example
1) property
2) borrowing
3) trade and other payables
Current assets examples
- Inventories (stock)
- Trade and other recievables
- Borrowing
ways to improve liquidity
liquidity problems can be prevented by keeping a tight control on financial resources. if current liabilities persistently exceed current assets the business can be said to have liquidity problems which may result in insolvency
- encourage cash sales and sell off stock-increase cash in our current assets and no effect on liabilities
- reduce credit period for customers- increase cash in current assets & no effect on liabilities.
- negotiate additional long term loans- raises current assets & raises non-current liabilities but no effect on current liabilities
working capital definition
working capital of a business is the amount left over after all current liabilities (short term debts) are paid.
net assets formula
total assets- total liabilities e.g. equity, share capital, all other reserves
TOTAL EQUITY IS ALWAYS THE SAME AS NET ASSETS
working capital formula
current assets- current liabilities
a business is classed as liquid if…
current assets are higher than current liabilities
