Make sure to capture the key words only, IB does not require word for word.
Define example
Current assets are possessions of an organisation with a monetary value, but intended to be liquidated within twelve months of the balance sheet date.
Outline example
Liquid assets are items of value owned by a business that are easily converted into cash. Cash is the most liquid of assets for an organisation. Other current assets (such as debtors and stocks) take a longer time to liquidate (change into cash). Fixed assets (such as buildings and specialist machinery) are not liquid assets as they are intended to be reused over a period of time lasting more than a year.
(a) Outline the meaning of liquid assets. [2 marks]→1
Liquid assets refer to current assets, short-term assets belonging to an organisation which will last in the business for up to 12 months.
(b) Explain two ways that a hotel might use to improve its cash flow position. [4 marks]→3
The costs that are part of a hotel’s cash inflow includes cash received through customer payments, customer’s spendings in its restaurants, etc. The hotel can increase cash inflow through increasing sales by implementing new promotion strategies so that customers could be attracted to the new pricing and make the decision to book at the hotel.
Another way the hotel can improve its cash flow position would be by considering reducing cash outflow. The costs that part of a hotel’s cash outflow includes staff salaries, the purchase of bedding, furniture, food ingredients, etc. The hotel can reduce cash outflow through improving stock management. This strategy will ensure that only need goods are stocked for food, toiletries and would not over-invest cash in goods that fluctuates according to customer bookings.
Your suggestions are valid, but you need to focus on financial strategies more specifically ie.
- Obtaining credit from suppliers, e.g., ingredients for restaurants or toiletries for the hotel rooms.
- Demanding customers pay a larger deposit for their rooms prior to check-in.
- Dynamic pricing, e.g., lower prices during off-peak periods due to lower levels of demand, and vice versa for peak periods.
- Seek external sources of finance, e.g., bank overdraft.
(a) Define the term working capital cycle. [2 marks]→1
Working capital cycle refers to the money that is available to the day to day operations of a business. It is calculated by subtracting current liabilities from current assets.
The working capital cycle refers to the time interval between cash payments for a firm's costs of production and the cash receipts from its customers for the purchase of goods and/or services bought. The time delay means that the business must manage its working capital (the money available for its day to day operations) very carefully to continue functioning.
(b) Explain the importance of working capital to business organisations. [4 marks]→3
Working capital involves cash that is used to cover various parts of the business that require short-term spendings including covering for unexpected costs, production of goods and services, bills. This indicates that working capital is essential in keeping the business running daily to improve business’ earnings and profitability. Working capital is also a factor that can reflect the various business activities. In addition, if a business is lacking working capital, the business could be led to insolvency and possibly even bankruptcy.
Working capital (or net current assets) refers to the liquidity available to a business organisation, i.e., the existing short-term assets of a firm to cover its current liabilities. Working capital is calculated as the sum of current assets (cash, stocks, and debtors) minus the sum of current liabilities (such as overdrafts, trade creditors, and dividends).
Having sufficient working capital is vital for the daily operations of a business as a business needs to have sufficient liquidity to cover its current liabilities. Having sufficient working capital can prevent insolvency - the financial state where a business organisation is unable to pay its liabilities. Hence, without adequate working capital, insolvency can cause businesses to go bankrupt.
Define, Explain calculations, What is it used for and what would happen if there is a lack of it?
(c) Distinguish between current assets and current liabilities. [4 marks]→4