2-3-2-liquidity

课 Progress

0% Complete

Statement of financial position (balance sheet)

The statement of financial position contains the financial information required to draw conclusions about the liquidity of the business
- Liquidity is the ability of a business to meet its short-term commitments (e.g. payments to creditors) with its available assets
- A business that cannot pay its bills will usually fail very quickly, even if it is profitable
- Managing liquidity is a key way to manage risk in a business — and it helps a business to prepare for the unexpected
The statement of financial position shows the financial structure of a business at a specific point in time
- It identifies a business’s assets and liabilities and specifies the capital (money) used to fund the business
- The statement of financial position is also known as the balance sheet

Example of a statement of financial position for Packer Sports Ltd

Ways to measure liquidity

The liquidity of a business can be measured using two ratios, the current ratio and the acid test ratio

The current ratio

The current ratio is a quick way to measure liquidity, and the outcome is expressed as a ratio
All forms of current assets are considered in this ratio
The current ratio is an effective liquidity measure for businesses that hold little stock
The result indicates how many £s of current assets a business has available to cover each £1 of its short-term debt
It is calculated using the formula

$Current space ratio space equals space fraction numerator Current space assets over denominator Current space liabilities end fraction space space equals space ? space colon space 1$

Worked Example

Packer Sports Ltd has current assets of £15,545, current liabilities of £5,060 and an inventory figure of £8,250.

Calculate Packer Sports Ltd’s current ratio.

[2]

Step 1: Substitute the values into the equation

$equals space fraction numerator £ 15 comma 545 space over denominator £ 5 comma 060 end fraction equals space space space space 3.07 space colon space 1$ [2]

In this example, Packer Sports Ltd has £3.07 of current assets to cover each £1 of short-term debt.

The acid test ratio

This is a precise way to measure liquidity and is expressed as a ratio
The acid test ratio is also known as the liquid capital ratio
The least liquid form of current assets (inventory/stock) is deducted, so the acid test ratio provides a more realistic measure of the business’s ability to meet short-term debts quickly
It is a particularly important measure of liquidity for businesses that hold a large amount of stock
It is calculated using the formula

<img alt=”Acid space test space equals space fraction numerator space Current space assets space minus space Inventory over denominator Current space liabilities end fraction space equals space space space space space ? space colon space 1″ data-mathml=”<math style=”font-family:Arial” ><semantics><mstyle mathsize=”14px”><mi>Acid</mi><mo> </mo><mi>test</mi><mo> </mo><mo>=</mo><mo> </mo><mfrac><mrow><mo> </mo><mi>Current</mi><mo> </mo><mi>assets</mi><mo> </mo><mo>-</mo><mo> </mo><mi>Inventory</mi></mrow><mrow><mi>Current</mi><mo> </mo><mi>liabilities</mi></mrow></mfrac><mo> </mo><mo>=</mo><mo> </mo><mo> </mo><mo> </mo><mo> </mo><mo> </mo><mo>?</mo><mo> </mo><mo>:</mo><mo> </mo><mn>1</mn></mstyle><annotation encoding=”application/vnd.wiris.mtweb-params+json”>{“fontFamily”:”Times New Roman”,”fontSize”:”18″,”autoformat”:true,”toolbar”:”<toolbar ref=’general’><tab ref=’general’><removeItem ref=’setColor’/><removeItem ref=’bold’/><removeItem ref=’italic’/><removeItem ref=’autoItalic’/><removeItem ref=’setUnicode’/><removeItem ref=’mtext’ /><removeItem ref=’rtl’/><removeItem ref=’forceLigature’/><removeItem ref=’setFontFamily’ /><removeItem ref=’setFontSize’/></tab></toolbar>”}</annotation></semantics></math>” height=”39″ role=”math” src=”data:image/svg+xml;charset=utf8,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20xmlns%3Awrs%3D%22http%3A%2F%2Fwww.wiris.com%2Fxml%2Fmathml-extension%22%20height%3D%2239%22%20width%3D%22329%22%20wrs%3Abaseline%3D%2224%22%3E%3C!–MathML%3A%20%3Cmath%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F1998%2FMath%2FMathML%22%20style%3D%22font-family%3AArial%22%3E%3Cmstyle%20mathsize%3D%2214px%22%3E%3Cmi%3EAcid%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Etest%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3D%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmfrac%3E%3Cmrow%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3ECurrent%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eassets%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E-%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3EInventory%3C%2Fmi%3E%3C%2Fmrow%3E%3Cmrow%3E%3Cmi%3ECurrent%3C%2Fmi%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmi%3Eliabilities%3C%2Fmi%3E%3C%2Fmrow%3E%3C%2Fmfrac%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3D%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3F%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmo%3E%3A%3C%2Fmo%3E%3Cmo%3E%26%23xA0%3B%3C%2Fmo%3E%3Cmn%3E1%3C%2Fmn%3E%3C%2Fmstyle%3E%3C%2Fmath%3E–%3E%3Cdefs%3E%3Cstyle%20type%3D%22text%2Fcss%22%3E%40font-face%7Bfont-family%3A’math143f4d31b04031e49f5eb18baba’%3Bsrc%3Aurl(data%3Afont%2Ftruetype%3Bcharset%3Dutf-8%3Bbase64%2CAAEAAAAMAIAAAwBAT1MvMi7iBBMAAADMAAAATmNtYXDEvmKUAAABHAAAADxjdnQgDVUNBwAAAVgAAAA6Z2x5ZoPi2VsAAAGUAAAA%2FGhlYWQQC2qxAAACkAAAADZoaGVhCGsXSAAAAsgAAAAkaG10eE2rRkcAAALsAAAADGxvY2EAHTwYAAAC%2BAAAABBtYXhwBT0FPgAAAwgAAAAgbmFtZaBxlY4AAAMoAAABn3Bvc3QB9wD6AAAEyAAAACBwcmVwa1uragAABOgAAAAUAAADSwGQAAUAAAQABAAAAAAABAAEAAAAAAAAAQEAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAACAgICAAAAAg1UADev96AAAD6ACWAAAAAAACAAEAAQAAABQAAwABAAAAFAAEACgAAAAGAAQAAQACAD0iEv%2F%2FAAAAPSIS%2F%2F%2F%2FxN3wAAEAAAAAAAAAAAFUAywAgAEAAFYAKgJYAh4BDgEsAiwAWgGAAoAAoADUAIAAAAAAAAAAKwBVAIAA

Business_A-level_Edexcel

1-marketing-and-people