Question
Extraordinary events can significantly impact comparisons of ratios over time. The devasting impact of the Covid-19 virus will effect most comparisons that include data for
Extraordinary events can significantly impact comparisons of ratios over time. The devasting impact of the Covid-19 virus will effect most comparisons that include data for the 2020 fiscal year. It remains to be seen how financial executives and analysts will adjust for comparisons across time; additional information to facilitate adjustments needed for comparisons will likely be included in disclosures in 10-K reports. An extraordinary event such as the spread of the Covid-19 virus has a pronounced affect on certain financial metrics that serve as flashing warning signals. Often the difficulty is that there is no way to heed the warning because the normal measures to prevent distress from worsening are not available. For example, a highly leveraged company with high debt service requirements could find that their "days cash on hand" has fallen into the danger zone, but there are no prospects on the horizon for future cash receipts because it is not possible to incent customers to make purchases. The personal cost of Covid-19 is the greatest cost, as many of us know from our own experiences. There are also economic consequences. The economic impact of Covid-19 will be felt by individuals, small businesses, larger domestic businesses, and global businesses in different ways. And the ability to respond to the economic impact of Covid-19 will vary depending upon context and available resources. Extraordinary events often call for extraordinary actions. Metrics can guide those actions. If an entity (individual, small business, etc.) observes that the metrics associated with liquidity such as the current ratio, the quick ratio, and days-cash-on-hand all indicate that a liquidity crisis will soon occur and current assets will not be sufficient to meet current liabilities, how could the entity respond? Assume the entity intends to remain financially sustainable post Covid-19 and does not plan to cease operations or declare bankruptcy. Provide three examples of pro-active responses the entity should consider in the face of the impending liquidity crisis
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