• Once the final accounts have been prepared, they provide valuable information about the financial position of the business. This information is then used to make important business decisions.
• The financial position of a business is also of interest to its stakeholders.
• Stock turnover describes the number of times a business’s stock has been sold and replaced during a trading period.
• Profitability is how much money a business has made. • Liquidity is the ability of a business to meet its short-term debts (e.g. suppliers’ invoices and utility bills).
• Solvency is the ability of a business to meet its external liabilities (e.g. utility bills and long-term bank loans).
• A business is solvent if the value of its total assets is greater than its external liabilities. • A business is insolvent if the external liabilities are greater than total assets. • Summary of calculations:
Working capital (current) ratio = current assets : current liabilities Acid test (quick) ratio = current assets – closing stock : current liabilities Solvency = total assets : external liabilities
Taking stock A
Go to page 206 of your Activities and Accounts Book to check what you have learned in chapter 28.
