9609 · 10.2.1
Liquidity ratios flashcards
Revision flashcards for Cambridge 9609 Liquidity ratios (syllabus 10.2.1). Flip, recall, then mark a real past-paper question.
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Current ratio formula?
Current assets ÷ Current liabilities.
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Acid test formula?
(Current assets − Inventory) ÷ Current liabilities.
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Why exclude inventory from acid test?
Inventory is least liquid — may not sell quickly at full value.
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Current ratio below 1:1?
Liabilities exceed current assets — may struggle to pay short-term debts.
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Very high current ratio?
May indicate excess inventory or idle cash — inefficient use of resources.
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Improve liquidity?
Reduce inventory, collect receivables faster, increase overdraft/loan, improve profit.
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Liquidity vs profitability?
Profitable firms can still fail if cash timing is wrong — liquidity is survival.
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Link to 5.2 finance?
Weak liquidity may require short-term external finance.
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What is liquidity?
The ability of a business to pay its short-term debts (current liabilities) using its short-term assets (current assets).
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What is the formula for the Current Ratio?
Current Assets / Current Liabilities
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What is the formula for the Acid Test (Quick) Ratio?
(Current Assets - Inventories) / Current Liabilities
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Why are inventories excluded from the Acid Test Ratio?
Because inventories are the least liquid current asset and cannot be relied upon to be converted into cash quickly to pay immediate debts.
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Name two long-term methods to improve a firm's liquidity.
1. Selling unused or idle non-current assets. 2. Sale and leaseback of property to release cash.