Business Studies Collins Revision Guide. - StudyGuide.PK

BUSINESS FINANCE (6)Liquidity ratios●●●●●Liquidity ratios look at the ability of the business to pay its debts.Assets that are easily turned into cash such as money in the bankare said to be liquid.Information needed to calculate liquidity ratios is contained in thebalance sheet.The two ratios that you need to know are the current ratio and theacid test.The formula for current ratio is current assets: current liabilities. Thisratio should normally be approximately 1.5 : 1.Too high a ratio and money could be better used by the business.The formula for acid test is (current assets – stock) : current liabilities.This ratio should normally be between 0.5 : 1 and 1 : 1 for thebusiness to be safe from bankruptcy. Stock is deducted from thecurrent assets as it may take too long to dispose of.Case studySally’s Ice Cream ParlourCash = £200Stock = £2500Bank = £1800Debtors = £500Current liabilities = £2500Current ratio = Current assets : Current liabilitiesCurrent assets = Stock + Debtors + Bank + Cash= £(2500 + 500 + 1800 + 200)= £5000Current liabilities = £2500Current ratio = 5000 : 2500= 2 : 1Acid test = (Current assets – Stock) : Current liabilities= (5000 – 2500) : 2500= 2500 : 2500= 1 : 150