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I. Introduction A business enterprise cannot survive without creditors. If the cash that the company reserved for its capital investment is not enough, it will acquire the additional money from the creditors. The reason that they are lending their money to the company is that they are investing. They are not giving away their money for nothing. The amount they give must be given back to them twofold, or tenfold. So its important for creditors, such as banks and bondholders, to monitor the ability of the company to pay their liabilities. The fact that these creditors are investing in the business means that they trust the company for spending their hard-earned money. This case study provides an in-depth investigation of how to persuade the creditors that Charisma Manufacturing Inc. is a very safe organization for investments.

II. Statement of the Problem Charisma Manufacturing Inc. has been asked to develop some key ratios from the comparative financial statements. The information is to be used to convince the creditors that the company is solvent and will continue as it is as a going concern.

III. Objectives The study aims to achieve the following objectives: 1. To know what are liquidity, profitability, and solvency ratios. 2. To learn how these ratios affect the companys image to the creditors. 3. To know the limitations that each of these ratios provide for the company. 4. To prepare an inference that may be drawn about the companys solvency.

IV. Areas of Consideration Before we look up in solving this problem, there are various areas that we will consider. In achieving the objectives of our study, we will use the comparative analysis. Comparisons can be made on different bases: Intracompany basis, Industry averages and Intercompany basis. Intracompany basis compares an item or financial relationship within the company in the current year with the same item or relationship in one or more prior years. Industry averages compares an item or financial relationship of a company with the norms and standards published by financial ratings. The third basis Intercompany basis compares an item or financial relationship of the company with the same item or relationship in one or more competing companies. To evaluate the significance of financial statement data, three common tools are used: Horizontal, Vertical, and Ratio analyses. Horizontal analysis evaluates a series of financial statement data over a period of time. Vertical analysis evaluates financial statement data by expressing each item as a percent of a base amount. Ratio analysis expresses the relationship among selected items of financial statement data. As stated, the financial statement of Charisma Manufacturing Inc. uses the 2007 and 2008 data. The selected ratios are group into liquidity, profitability, and solvency ratios. Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Such ratios would be current ratio and acid-test (quick) ratios. Profitability ratios measure the income or operating success of a company for a given period of time. Under those would be asset turnover and earnings per share, to name a few. Solvency ratio measures the companys ability to survive over a long period of time. This ratio is particularly interested in the companys debt-paying ability.

V. Alternative Courses of Action Creditors fuel the companys money supply. Even big companies, like McDonalds for that matter, have thousands of creditorsbig and smallthat lined up the list of liabilities for the company. A detailed report that shows the different financial statement components must be

made for the creditors. Aside from ratio analysis, vertical and horizontal analysis must be also used as these two comparisons show a direct difference between the balance sheet and statement of financial position elements for two or more periods of time. Comparative balance sheets and income statements are helpful ways in comparing the increase or decrease of assets, liabilities, revenues and expenses. Retained earnings statement gives information regarding the percentage of net income that goes to the pockets of the shareholders. It is also very important to include the statement of cash flows as one of the financial statements. The other three financial statements provide only limited information. For example, comparative balance sheets show an increase of assets, but, it does not show if the funding came from cash or issuance of debt. Similarly, the income statement shows the net income of the company and not the cash generated. And the retained earnings statements only show cash dividends declared and not those paid. While it is also very important to disclosed private information, Charisma Manufacturing Inc should be aware of the fact that creditors also need to study and analyze the companys ability to pay its liabilities. Doing this will assure the creditors that the company cherishes and value the welfare of its creditors. It is their right to know the goings-on of the company because they are also part of the organization.

VI. Analysis The data requested and the computations develop from the financial statements follow.

2008 Current Ratio Acid-test Ratio Asset Turnover Net Income Earnings per Share 3.1 times .8 times 2.8 times Up 32% $ 3.30

2007 2.1 times 1.4 times 2.2 times Down 8% $ 2.50

Current ratio is a widely used measure for evaluating the companys liquidity and shortterm debt-paying ability. This is computed by dividing currents assets by current liabilities. On

2007, assets were two times than liabilities, while the 2008 data showed that assets are three times than liabilities. The data showed that the current ratio increased by half. This means that for every dollar of liabilities, the assets increased by half. This increase can be due to an increase in assets or a decrease in liabilities. Acid-test (quick) ratio is computed by dividing the sum of cash, short-term investments, and net receivables by current liabilities. One reason this ratio is called such is because this measure uses the immediate liquidity. This ratio is an important complement of current ratio. Since current ratio increased over the two periods, we can expect quick ratio will do the same, but it did not. Instead, it decreased. One way to view this is to look at the other current assets. Current assets are composed of cash, short-term investments, net receivables, inventory, and prepaid expenses; in the order of their liquidity. The last two are not highly liquid because inventory is not readily saleable and prepaid expenses are not easily transferred to others. So we can say that these two are the main reasons why current ratio increased and quick ratio decreased. The company may be is expecting a rise in demand since both the inventory and prepaid expense increased. One example may be is the Christmas season. Lets state Charisma Manufacturing Inc as a manufacturer of Christmas lanterns and goodies. The company is spending much on benefits that it will get in the future such as the insurance in a store at a bazaar in December. This example can be also attributed to the increase in inventory as the company is pumping the supply for the season. When we talk of turnovers, we speak of sales. Asset turnover measures how efficiently a company uses its assets to generate sales. It is determined by dividing net sales by average assets. The resulting number shows the dollars of sales produced by each dollar invested in assets. In 2007, Charisma generated sales of $2.20 for each dollar invested in assets, while $2.80 in 2008. We can see that it increased a little during the two periods. If we follow our assumption, the demand of Christmas and goodies is relatively similar in the past two years. If we look at closely, net income decreased in 2007 and increased in 2008. Earnings per share (EPS) increased from $ 2.50 to $ 3.30. These increases are complementary. Earnings per share is computed by dividing net income by the number of weighted average ordinary shares outstanding. This measures the net income earned on each ordinary share. There is also the possibility that the increase in EPS is due to a decrease in ordinary shares. The company might

have bought back the shares, which I doubt since its hard for a company to buy back the shares at the same time acquiring shares. Unless, there is a significant increase in cash, net income, and sales, buying the shares is possible; of which it is not in this case. No matter how perfect we want the company to be, there will be limitations that will somewhat be beneficial to our study. Ratios can provide clues to underlying conditions that may not be apparent from individual financial statement components. However, a single ratio by itself is not very meaningful. There will be other ideas also that we will use in supporting the solvency and goingconcern potential of the business. There is the fact that even if net income increased, it may be small, like $ 3 000. On the other hand, it can also be worth $ 100 000. However, it can be relatively small compared to the industry averages such as $ 150 000, or the competitors net incomes of $ 1 000 000. Cash also proves to be a significant factor in solvency issues. Although net income is big, cash may be small, and vice versa. This is may be for the reason that a big part of net income (sales) is composed of net receivables. Comparisons are important so that we will have a more detailed discussion. The market selling prices and unit selling prices that measure the assets and liabilities that we used in our computations are not adjusted for inflation. It is possible that when we purchase equipment, the market price is greater than when we purchase that same equipment months ago. Similarly, prices of raw materials increased for a specific period of time and thus, affect the prices of the finished goods.

VII. Conclusion Charismas data shows favourable information for the solvency and potential concern of the business. The fact that Charisma is preparing a lot for boosting up the supply through its inventories means it is expecting for further sales and possibly an increase in profit and net income. Investing in bazaars, as what we are expecting, may be is a bit risky. But then, businesses, in order to survive, must sometimes look for ways to make more money. I dont think that businesses are very careless and ungrateful for the people who helped them. Good

organizational structure, values and abilities of the members are also factors in managing the company, so as not to end up like Xerox and Enron. A reminder also for creditors: dont put all your money to a single company. Money is a worldly thing, yes, but it is important for us to survive. Investing in companies by means of bonds and shares are only for people who have lots of money at hand. If a person hasnt enough money, then he or she must not invest in this venture because the return will be in years. Youll be a beggar even before you received your payback. And also, there can be no loss to a wise creditor. It is very important to know where your money is going. Be aware of your surroundings. Listen and monitor them.