Business studies notes

PREPARED BY

CHAIRMAN
Liquidity
• Describes the degree to which an asset or security can be bought or
sold in a market without affecting the asset’s price
• Accounting liquidity measures the ease with an individual or company
can meet their financial obligations with the liquid assets available to
them
• Cash is considered as the standard for liquidity
• Is a measure of their ability to pay off debts as they come , to have
access to their money when they need it.
Ratios used to measure liquidity
•  Current ratio
current ratio =
Current assets are those assets which can easily be converted to cash in
a single year
Acid test or quick ratio
It is slightly more strict . It excludes inventories and other current assets
which are not as liquid as cash and cash equivalents, accounts
receivables and short term investments
Liquidity ratios
•  Cash ratio
Is the most exacting of liquidity ratios excluding accounts receivables as
well as inventories and other current assets.
 it asses an entity’s ability to stay solvent in the case of an emergency
 cash ratio =
What do liquidity ratios measure
Liquidity ratios work with cash and near cash assets (“current assets”)
of a business
Immediate payment obligations which include dues to suppliers
Operating and financial expenses that must be paid shortly
Maturing instalments under long term debt
Measure a business’s ability to meet the payment obligations by
comparing the cash and near cash current assets against its
obligations
Profitability
Without profitability a business will not survive in the long run
therefore measuring past , current profitability and projecting future
profitability is very important
Profitability is measured with income and expenses.
Income is money generated from the activities of the business
 expenses are the costs of resources used up or consumed by the
activities of the business
Reasons to compute profitability
Process to measure profitability
• 
Profitability is also measured using profitability ratios
Profit margin ratio
Net sales = gross sales – sales returns/refunds
Net income = net sales – expenses

Profit margin ration =

Gross profit margin ratio

Return on investment
Return on capital employed