A-AS Level (CIE) Business Studies Paper-1: Specimen Questions with Answers 17 - 18 of 50

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Question 17


Write in Short

Short Answer▾

What do you mean by liquidity?


Liquidity is a wat to measure your business՚s ability to use current assets to cover liabilities. A mismatch between asset and liability not only generates rate risk but also liquidity risk. Assets of a company are listed on the balance sheet in the order of liquidity decreasing assets, which means that the most liquid assets are listed at the first place and so on. Current assets of a company are liquid and include both cash and assets. Asset is expected to be converted into cash over the next 12 months. Fixed assets are mostly illiquid. These fixed assets consist of tangible assets like, equipment, furniture, and buildings that don՚t convert to cash at all in normal business activity.

Question 18


Describe in Detail


Define working capital. State two methods a business uses to manage its working capital


The term Working Capital also called gross working capital refers to the firm՚s aggregate of Current Assets and current assets are these assets which can be convertible into cash within an accounting period, generally a year. Therefore, they are Cash or mere cash resources of a business concern. However, we can understand the meaning of Working Capital from the following: “Working capital means the funds available for day-to-day operations of an enterprise. It also represents the excess of current assets over current liabilities including short-term loans.”

Working capital refers to the excess of firm՚s current assets over current liabilities.

Working Capital Working Capital Has Two Concepts

  • Gross working capital and
  • Net working capital.

Gross Working capital refers to the total of the current assets and net working capital refers to the excess of the current assets over current liabilities. Gross working capital is more helpful to the management in managing each individual current asset for day operations. When we want to know the sources from which funds are obtained. it is net working capital that is more Important and should be given greater emphasis.

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