After graduating from university in May 2020 and investigating the opportunities available to her, Emily Anthony becomes a shareholder of Anthony Business Company (ABC) and assumes the position of administrator. She begins familiarizing herself with the business operation and all of the information that is available to help her run the business day to day.

While at a computer trade show, Emily meets Michael Richards, operations manager of Software Solutions Inc., a publicly traded software development company. After much discussion, Michael asks if ABC would consider being one of Software Solutions’ customer service support suppliers. He offers to provide Emily with Software Solutions’ financial information to assist with her analysis of this offer. He anticipates that ABC will need to provide Software Solutions’ customers with approximately 500 hours of support service each month. He suggests ABC provide a monthly invoice to Software Solutions, with payment approximately 30 days from the date of the invoice. 

Emily is excited about this offer. However, she is concerned that taking on this contractual commitment will be too much for ABC to handle given the other service contracts recently signed by the company.

Instructions

Emily comes to you for advice and asks the following questions:

a. Michael Richards has offered to provide me with Software Solutions’ financial information. Can you please remind me about what financial statements I should request and explain what type of information each one provides?

b. How do I know that the information in the financial statements is verifiable and prepared on a timely basis?

c. I would like to be sure that Software Solutions will be able to pay ABC’s invoices. How can I determine if Software Solutions is able to satisfy its current liabilities? Are there any ratios and/or financial information I should look at to obtain that information? If so, which ones?

d. How can I assess if Software Solutions is profitable? Are there any ratios and/or financial information I should look at to get that information? If so, which ones?

e. How can I determine the extent of Software Solutions’ total liabilities? I want to find out if Software Solutions is able to pay off both its liabilities and the related interest. Are there any ratios and/or financial information I should look at to get that information? If so, which ones?

f. If ABC were to sign a contract committing to provide 500 hours of service per month, what other factors should I consider before accepting the contract?