E2-8 (Using working capital to assess solvency) A retail company’s recent balance sheets showed the following information. Accounts payable is the only current liability. 12/31/96 12/31/95 Cash $ 4,500 $ 7,000 Accounts receivable 6,000 9,000 Inventory 14,000 10,000 Total current assets $24,500 $26,000 Accounts payable 12,000 11,000 Current assets minus current liabilities $12,500 $15,000 REQUIRED: Define solvency and discuss how this information might be useful in assessing the company’s solvency position. What drawbacks are associated with using this information in this way?