2.3.2 Liquidity

What are assets?

Resources belongig to a business that hold economic value

What is a balance sheet?

A snapshot of the business' assets and its liabilities on a particular day

What are current and non-current assets?

- Current- Assets that will be converted into cash withn one year

- Non-current- Long term resources that will be used repeatedly over a period of time

What are current and non-current liabilities?

Current- Money owed by the business that must be repaid within one year. These include loans or money owed to suppliers.

Non-current- Money owed by the business for more than one year, sometimes called long term liabilities

What are the functions of liquidity ratios?

They asses whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due

How is current ratio caculated?

Current ratio= current assets/current liabilities

How do we interpret current ratios?

- A ratio of 1.5 - 2.0 would suggest effcient management of working capital

- Low ratio of below 1 indicates cash problems

- High ratio means there is too much working capital

What is working capital?

The amount of money needed to pay for the day to day trading of a business after current debts have been paid.

How is acid-test ratio calculated?

(Current assets - stocks) / current liabilities

How can we evaluate the acid test ratio?

- A good warning sign of the liquididty problems for businesses that usually hold stocks.

- Significantly less than 1 is often bad news.

How can we calculate working capital?

Current assests - current liabilities