Accounts+&+Finance

Define the term //liquidity problem (line 111) // Liquidity is how quickly and cheaply an asset can be converted to cash, a liquidity problem is when a country's government or a bank runs short of cash, and has short term debt problems but is secure in the long term.

//Teacher's comment: A better answer would be...Liquidity refers to the buisness' ability to pay its debts. A liquidity problem (as identified by either the current ratio or acid test ratio) indicates an inability to pay short term or immediate debts.//

Calculate N-Pharma's subsidiary's working capital for both of the years 2008 and 2009.

Working capital = Current Assets - Current Liabilities __Year 2008__ Working capital = (190+310+250) – (620+115) Working capital = 750 – 735 Working capital = $15m

__Year 2009__ Working capital = (60+350+356) – (630+230) Working capital = 766 - 860 Working capital = $ (94)m

Using liquidity ratios, comment on N-Pharma's current liquidity position.

Using the data from appendix 2, calculate the liquidity ratios of N-Pharma’s USA subsidiary in the financial years 2008 **and ** 2009.   Year 2008   __Current assets __ __Current Liabilities__  Stock = 250 Creditors = 620 Debtor = 310 Short-term borrowing = 115 Cash = 190 **Total = __750__ Total = __735__** <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;"> Current ratio = __750__ 735  Current ratio = **1.02**
 * <span style="color: red; font-family: 'Arial','sans-serif'; font-size: 10pt;">Current ratio= __Current Assets__ **
 * <span style="color: red; font-family: 'Arial','sans-serif'; font-size: 10pt;"> Current Liabilities **

Acid test (quick) ratio = __750 – 250__ 735 Acid test (quick) ratio = __500__ 735 Acid test (quick) ratio = **0.68**
 * Acid test (quick) ratio= __Current assets – Stock__ **
 * Current liabilities **

__<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Current assets __<span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;"> __Current Liabilities__ <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;"> <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Stock = 356 Creditors = 630 <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Debtor = 350 Short-term borrowing = 230 <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Cash = 60 <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;"> Current ratio = __766__ 860 Current ratio = **0.89** Acid test (quick) ratio = __766 - 356__ 860 Acid test (quick) ratio = __410__ 860 Acid test (quick) ratio = **0.48**
 * __ Year 2009  __**
 * <span style="color: red; font-family: 'Arial','sans-serif'; font-size: 10pt;">Current ratio= __Current Assets__ **
 * <span style="color: red; font-family: 'Arial','sans-serif'; font-size: 10pt;"> Current Liabilities **
 * <span style="color: black; font-family: 'Arial','sans-serif'; font-size: 10pt;">Total = __766__ Total = __860__ **
 * Acid test (quick) ratio= __Current assets – Stock__ **
 * Current liabilities **

Analyse the reasons for the changes in the liquidity ratios of N-Pharma’s USA subsidiary between 2008 and 2009

Explain why organizations such as N-Pharma need working capital

Working capital, which refers to the money that is available for the day to day running of a business, is important as a source of finance because it is needed to pay for everyday costs such as wages, utility bills, and payments to suppliers. In this case it allows N-Pharma to run successfully.

Discuss methods by which N Pharma might use to improve the liquidity position of its USA subsidiary