Profit And Loss Account and liquidity calculations Flashcards Preview

A Level Business Studies - Accounting And Finance > Profit And Loss Account and liquidity calculations > Flashcards

Flashcards in Profit And Loss Account and liquidity calculations Deck (18):
1

define working capital

Working capital - the money used for the day to day running of the business

2

How do you work out working capital from the profit and loss account

Working capital = current assets - current liabilities

3

What is the equation for current ratio

1. Current ratio = current assets / current liabilities
2. = ANS:1

4

What does the answer from the current ratio equation mean

ANS:1 = for every £1 you owe you own the ANS

5

What is the ideal ratio range for current ratio results

1.5:1 - 2:1 as it shows efficient management of working capital

6

What’s the issue with ratios too high or too low in the current ratio answers

1. Too high = too much working capital
2. Too low = cash problems

7

What is the equation for the asset test ratio

1. Asset test ratio = (current assets - stock) / current liabilities
2. = ANS:1

8

What does the answer convey from the asset ratio test

A sigh on how liquid your assets are. Significantly less than 1:1 is bad news

9

What is the equation for the debter collection period

DCP = (debters / turnover) x 365

10

What does the answer from the debters collection period convey

The lower the answer the sooner you get paid

11

What is the equation for creditor days

CD = (trade payables / cost of sales) x 365

12

What does the answer of trade payables convey

ANS = how many days it takes you to pay your liabilities

13

What is the formula for the gearing ratio

1. Gearing % = loans / (loans + shares + profits)
2. ANS x 100

14

What does the gearing test show

The % of an investment you owe compared to what you own

15

What is an answer >50% on the gearing test said to be

Highly geared

16

What is the formula intrest cover

Intrest cover = profit before tax and intrest / intrest

17

What does the value of the intrest cover test show

The value shows you how many times you can pay the value of intrest

18

What are the names of the 4 liquidity ration you need to know

1. Asset test ratio
2. Current ratio
3. Debters collection (days)
4. Creditor payment (days)