Liquidity
- Created by: Izzie
- Created on: 12-05-17 09:44
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- Liquidity
- Statement of financial position (AKA balance sheet)
- Balances net assets with total equity
- Assets= items of value owned by a business
- Non-current assets are likely to be kept in the business for more than 1 year
- E.g. vehicles, premises, machinery
- Current assets are likely to be turned into cash within a year
- E.g. stock, cash & cash equivalents
- Shown as positives
- Non-current assets are likely to be kept in the business for more than 1 year
- Liabilities= the money a business owes
- Non-current liabilities are debts the business has MORE THAN 1 year to repay
- E.g. bank loans
- Current liabilities are debts the business has to repay WITHIN 1 year
- E.g. overdrafts, accounts payable (creditors)
- Shown as negatives
- Non-current liabilities are debts the business has MORE THAN 1 year to repay
- A measure of a firm's short term survival
- Current Assets/Ratio
- Stocks assumed to be the most illiquid part as it's hard to turn them into cash quickly
- Acid test ratio over 1.0 is generally good news
- Business with low liquidity's in danger if short term creditors demand quick payment
- Improving Liquidity
- Aim is to increase current assets &/or reduce current liabilities
- Sell assets no longer being used e.g. turn from non-current asset to current asset
- Switch to long term sources of finance
- Monitor debtors to avoid bad debts (people who are bad at paying debts off)
- Move cash balances from current account to high interest account so value increases more rapidly
- Working capital = measure of a firm's liquidity/ability to meet day to day expenses
- Stated on financial position as net current liabilities / assets
- Shareholders/owners, suppliers & investors need to know about the businesses liquidity
- Statement of financial position (AKA balance sheet)
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