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