Year 2: 2024 Lesson 9

What does the balance sheet show?

• Income, expenditure and profit over the last year

• Budgeted versus actual outcomes as achieved on the balance sheet date

• Forecasted inflows and outflows to the balance sheet date

• The value of assets, liabilities and shareholders funds at the balance sheet date

What is shareholders funds equal to in the balance sheet? (all lower case)

Shareholders funds is made up of retained profit, reserves and what else? (all lower case)

There are 3 relative measures of liquidity that you need to know for your specification, the gearing ratio, the acid-test ratio and the....?

Which is an incorrect breakdown of capital employed?

• Shareholders funds + non-current liabilities

• Share capital + reserves + retained profit + non-current liabilities

• Share capital + retained profit + reserves

• Net assets + long-term liabilities

When working out capital employed. If you have a figure for net assets, what must you add to this to get capital employed?

• Retained profit

• Non-current liabilities

• Current liabilities

• Reserves

Which is the correct formula for the current ratio?

• Current Assets - inventory / Current liabilities

• Current Assets / Current liabilities

• Current Assets / shareholders funds

• Current Assets / capital employed

A business has trade receivables of £140,000, trade payables of £75,000, inventory of £65,000 and cash of £15,000. What is the current ratio? (express answer using 2 decimal places and as a ratio)

Which is the correct formula for the calculation of the acid test ratio?

• Shareholders funds / Capital employed

• Current assets / Current liabilities

• Current assets - inventory / current liabilities

• Current liabilities/ inventory

A business has a current ratio of 1.2:1 and an acid-test ratio of 0.9:1. What would be the best judgement of these ratios?

• The current ratio shows weak but adequate liquidity; however the business needs to ensure that its stock is sold quickly, otherwise it may experience liquidity issues.

• The current ratio shows inadequate liquidity, being below 1.5:1. The business will struggle to meet its liabilities. This is further compounded by the acid test ratio being less than 1.

• The current ratio shows strong short-term liquidity, since working capital is clearly positive. So long as the business sells its stock it has no liquidity issues to worry about.

• Both the current ratio and acid-test ratio are adequate, the business could improve its liquidity by holding more stock to improve the current ratio, but the business should not experience any cash shortfalls.