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Interpreting K-1 filings for ratios and disclosure

Please examine the current and contingent liabilities of GM and answer the below questions:

General Motors (sort filings by "annual filings" and select the Feb. 28, 2008 10-K).

What is the company's current ratio and acid-test ratio? What does this mean?

Discuss at least 1 aspect of current liabilities, i.e. notes payable, accounts payable, employee-related liabilities, income taxes payable. GAAP requires full disclosure relating to all current liabilities. Please use the related disclosure in your discussion.

Identify and discuss at least 1 contingent liability. You will also find applicable disclosures for all contingent liabilities.

Solution Preview

In order to answer the questions related to this problem, you will need to identify the Consolidated Balance Sheets from the link you provided regarding the GM filing. (The Consolidated Balance Sheet begins on page 106). You will also need the formulas for the basic ratios the problem requests:

Current Ratio = (Current Assets/Current Liabilities)
Acid-Test Ratio = (Cash, Accounts Receivable & Short term investments)/Current Liabilities.

The difference between these two ratios is that the acid test ratio removes the effect of inventory. This is important because it gives a better picture of a company's ability to meet the obligation of current liabilities without the need to liquidate inventory (which is not necessarily easy for a company to do.)

Beginning on page 114 of the GM 10-k, you will find the disclosures related to the way the company accrues and accounts for the current liabilities. Since GM has been in the news recently related to the burden defined benefit pensions have place on the cash flow of the company, this may be a good disclosure to analyze. (See the disclosures related to "Labor Force", "Early Retirement" and "Extended ...

Solution Summary

Overview of interpretation of portions of General Motors K-1 filing. Discussion of contingent liabilities, how to read a K-1, consideration of discloures and how they can be viewed relative to current events. Overview and calculation of certain financial ratios. (Current, Acid-Test,Quick)