Current Ratio

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What do liquidity ratios measure?
They assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due
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How do you calculate current ratio?
Current Assets/Current Liabilities
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What does a ratio of 1.5-2 show?
Acceptable level of liquidity and efficient management of working capital
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What does a low ratio (well below 1) show?
Liquidity issues
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What does a high ratio (well above 2) show?
Possibly too much working capital tied up in inventories or debtors
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Explain what a current ration of 2.2:1 means
For every £1 of debt, the business has £2.20 in assets
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Where can the current ratio be found?
On the balance sheet
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Identify 3 assets of a business
Stock, cash, debtors (money owed to them)
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Identify 2 current liabilities of a business
Creditors, overdraft
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Why is a bank loan not a current liability?
Because it does not have to be repayed within 12 months
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Other cards in this set

Card 2

Front

How do you calculate current ratio?

Back

Current Assets/Current Liabilities

Card 3

Front

What does a ratio of 1.5-2 show?

Back

Preview of the front of card 3

Card 4

Front

What does a low ratio (well below 1) show?

Back

Preview of the front of card 4

Card 5

Front

What does a high ratio (well above 2) show?

Back

Preview of the front of card 5
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