The table below shows selected financial information for NorthPier Kayaks, a small business that hires kayaks and sells safety equipment at a coastal market...
Question 1 Report
The table below shows selected financial information for NorthPier Kayaks, a small business that hires kayaks and sells safety equipment at a coastal market. The owner, Azeem, is considering two options: buying new kayaks or keeping more cash available for unexpected repairs. He wants the business to remain able to pay suppliers on time while protecting profit. All figures are for 31 December 2026.
| Item | Value (£) |
|---|---|
| Cash | 18 000 |
| Inventory of buoyancy aids and paddles | 27 000 |
| Trade receivables | 9 000 |
| Current liabilities | 36 000 |
(a) State what is meant by a current liability. [2]
(b) Calculate NorthPier Kayaks' current ratio. Show your working. [2]
(c) Analyse one reason why Azeem may select the option of retaining more cash rather than purchasing new kayaks. [3]
(d) Discuss whether a current ratio of 1.5:1 is likely to be suitable for this business. [3]
Answer Details
(a) A current liability is a debt or obligation owed by a business that must be paid within one year, or the next 12 months. [2 marks]
(b) Current assets:
\[\pounds18\,000+\pounds27\,000+\pounds9\,000=\pounds54\,000\]
Current ratio:
\[\frac{\pounds54\,000}{\pounds36\,000}=1.5:1\]
The current ratio is 1.5:1. [2 marks]
(c) Retaining cash gives NorthPier funds to pay suppliers, wages, or repair bills when they are due. Kayak hire is seasonal, so cash receipts may be lower outside the tourist period. Keeping cash reduces the risk of missed payments, penalties, and damaged supplier relationships. [3 marks]
(d) A ratio of 1.5:1 means current assets are greater than current liabilities, suggesting NorthPier should be able to pay short-term debts. However, £27,000 of its current assets are inventory, which may not be sold quickly or at the expected value. Actual liquidity may therefore be weaker than the ratio suggests. The ratio may be suitable if bookings and sales create regular cash inflows, but seasonal demand and the need for cash repairs must also be considered. [3 marks]
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