Objective

Calculate liquidity ratios

Analyse the financial performance of a

business.
Definition
Liquidity: the ability of a firm to
pay its short-term debts.
 Liquidity

$ 000’s
Current Ratio
Non-Current Assets. 10 Current Assets
Current Liabilities
Current Assets
Inventory 20
45,000 = 1.28
Trade receivables 20
35,000
Cash 5

Current Liabilities
Accounts payable 20
Overdraft 15

Net Current Assets/ 10

Working Capital
 Liquidity

$ 000’s
Current Ratio
Non-Current Assets. 10 Current Assets
Current Liabilities
Current Assets
Inventory 20
45,000 = 1.28
Trade receivables 20
35,000
Cash 5

Current Liabilities Acid Test Ratio. (Quick ratio)

Accounts payable 20
Overdraft 15 Current Assets - inventory
Current Liabilities
Net Current Assets/ 10
Working Capital (45000-20,000) = 0.71
35000
 Liquidity

What’s a ‘good’ level?

No perfect answer!

Current Ratio - “Ideal” 1.5-2. ( > 2 is too much! - opportunity cost)

Acid test (quick ratio) – “ideally” above 1

BUT…consider CONTEXT
past history ?
power relationship with suppliers/bank?
size of business
Worksheet Activity
 16 Liquidity Ratio worksheetSTUDENT

“16 Liquidity Ratios 2014-5STUDENT” for now -

homework if not completed
Starter
Activity 30.5
page.456
5 mins max
 Is the
liquidity of
Air
Mauritius
sufficient?
HOME LEARNING
1) Worksheet on Stakeholders and their
interest in Accounts
”17 Stakeholders Interest in Accounts STUDENT”

You will need to learn this!

2) Edpuzzle pre-learning on Cash Flow

 Liquidity

$ 000’s
Current Ratio
Non-Current Assets. 10 Current Assets
Current Liabilities
Current Assets
Inventory 30
?= ?
Trade receivables 25
?
Cash 3

Current Liabilities Acid Test Ratio. (Quick ratio)

Accounts payable 20
Overdraft 12 Current Assets - inventory
Current Liabilities
Net Current Assets/ ?
Working Capital (? -? ) = ?
?
 Liquidity

$ 000’s
Current Ratio
Non-Current Assets. 10 Current Assets
Current Liabilities
Current Assets
Inventory 30
58,000 = 1.81
Trade receivables 25
32,000
Cash 3

Current Liabilities Acid Test Ratio. (Quick ratio)

Accounts payable 20
Overdraft 12 Current Assets - inventory
Current Liabilities
Net Current Assets/ 58
Working Capital (58000-30,000) = 0.88
32000
 Objective

Research methods to improve financial

performance

Analyse the financial performance of a

business.
Methods to improve…
…and evaluations
 Profit Margins
 Relates to the “Income statement”
 trading account
 profit and loss account
 appropriation account

 Liquidity
 Relates to the “Statement of Financial Position”
Methods to improve Profit Margins…
Income
 statement

 Increaseprice?
 Reduce COGS?

 Reduce overheads?
Methods to improve Liquidity
 Statement of Financial
Position
 Boost Cash
 Reduce CL

 Reduce Non current assets?

 Liquidate (or run down)
Stocks?

 Increase long-term loans

Methods to improve…
…and evaluations
 Activity – complete the worksheet
”17 Method to improve
performanceSTUDENT”

 Some missing words, some questions to think

about for evaluation points.

 in your group try to answer these questions!

P 462 Data Response.
Answer questions 2,3,4 – come back for a review
T: Gross profit = revenue less cost of sales = $330m
2014. 2013