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Liquidity and Solvency Analysis Guide

The class notes discuss the importance of liquidity and solvency in financial statements, emphasizing their roles in assessing a company's ability to meet cash needs and remain operational. Key components of the balance sheet and statement of activities are highlighted, including changes in assets, liabilities, and net assets, as well as profitability indicators. Additionally, the notes outline critical questions for financial analysis, focusing on cash flow issues, liabilities, and contingencies disclosed in footnotes.

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14 views3 pages

Liquidity and Solvency Analysis Guide

The class notes discuss the importance of liquidity and solvency in financial statements, emphasizing their roles in assessing a company's ability to meet cash needs and remain operational. Key components of the balance sheet and statement of activities are highlighted, including changes in assets, liabilities, and net assets, as well as profitability indicators. Additionally, the notes outline critical questions for financial analysis, focusing on cash flow issues, liabilities, and contingencies disclosed in footnotes.

Uploaded by

jess.ortiz.garcia
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Class Notes 2/19

If cash flow statement is negative this has to do with liquidity and solvency

Footnotes are real, pay attention because they are telling you facts,
contingencies, risks

Liquidity and Solvency:

Liquidity indicates the ability to meet cash needs

Current assets and current liabilities

Cash Flow Statement (how cash needs were met)

Solvency indicates the ability to stay in business

Net assets and overall balance sheet position

Statement of Activities (“are they profitable”)

Both Liquidity and Solvency are required for “going concerns”

Balance Sheet:

Did total assets, liabilities and net assets increase or decrease?

Did current assets and current liabilities increase or decrease – which


accounts caused the biggest changes? (especially if current liabilities are
greater than current assets)

Are there any major changes in cash, debt, receivables or payables?

What are the major components of net assets (unrestricted, temp restricted
or permanent) – any accumulated deficits?

Statement of activity:

What are the net changes in net assets (also called excess of revenues over
expenses etc) – this tells you the overall profitability

What were the major components of revenue and expense and where are
the major changes (especially those in excess of 5%) from the prior year?

Are there major changes in restricted funds?

Statement of Cash Flows


Did cash increase or decrease significantly from the prior year?

What caused the increase/decrease – cash flows from operations, investing


or financing activities (major categories)?

If cash flow from operations is negative – how did they meet their cash needs
– by selling investments or incurring debt?

Did they make major fixed asset additions – how did they fund those
acquisitions – from debt or from other sources?

Financial Analysis 101- Questions to Ask

Provides more detail on investments, fixed assets, debt, pledges and


restricted funds

Look for potential cash flow issues based on schedule of when pledges are
due and when debt payments are required

What other liabilities are disclosed in the footnotes – pension, operating


leases?

Are there major contingencies disclosed in the footnotes?

Eisenhower Matrix

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