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Question 25 (a) Calculate the relevant ratio or percentage that demonstrates the liquidity position of the business - HSC - SSCE Business Studies - Question 25 - 2008 - Paper 1
Question 25
Question 25 (a) Calculate the relevant ratio or percentage that demonstrates the liquidity position of the business. Show your workings clearly. (b) Discuss two st... show full transcript
Worked Solution & Example Answer:Question 25 (a) Calculate the relevant ratio or percentage that demonstrates the liquidity position of the business - HSC - SSCE Business Studies - Question 25 - 2008 - Paper 1
Step 1
(a) Calculate the relevant ratio or percentage that demonstrates the liquidity position of the business. Show your workings clearly.
Answer
To demonstrate the liquidity position, we can calculate the current ratio. The current ratio is given by:
For example, if the business has current assets of 60,000, the current ratio would be:
This indicates that the business has 1 in current liabilities, demonstrating a strong liquidity position.
Step 2
(b) Discuss two strategies that management could adopt to improve liquidity.
Answer
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Managing Receivables: By tightening credit policies and improving debt collection processes, management can convert receivables into cash more quickly, enhancing liquidity.
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Sale and Lease Back: Selling under-utilized assets and leasing them back can generate immediate cash while allowing continued use of the assets, thereby improving liquidity.
Step 3
(c) Explain how a business can determine the return on owners’ investment.
Answer
To determine the return on owners’ investment, a business typically calculates the Return on Equity (ROE), which is defined as:
For example, if a company has a net income of 200,000, the ROE would be:
This means that for every dollar of equity, the shareholders earn $0.25, indicating a healthy return on their investment.