As the CPA for Carismo Manufacturing Inc., you have been asked to develop some key ratios from the comparative financial statements. This information is to be used to convince creditors that the company is solvent and will continue as a going concern.
Carismo Manufacturing Inc. asks you to prepare a list of brief comments stating how each of these items supports the solvency and going-concern potential of the business. The company wishes to use these comments to support its presentation of data to its creditors. You are to prepare the comments as requested, giving the implications and the limitations of each item separately. Then prepare a collective inference that may be drawn from the individual items about Carismo's solvency and going-concern potential.
The current and quick ratio measures the liquidity of a firm. Liquidity is the ability to meet the current liabilities and so is a form of going concern since the firm is able to meet the current liabilities. A current ratio greater than 1 implies that current assets exceed current liabilities and so liquidity is good. For Carismo the current ratio has improved from 2.1 to 3.1 and so the liquidity is better. The quick ratio is a more strict measure of liquidity and that ...
The solution explains how to calculate some key ratios from the comparative financial statements and the impact of these ratios on solvency and going concern potential of the company