Solvency - Solvency Solvency ratios measure the ability of...

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Solvency Solvency ratios measure the ability of a company to survive over a long period of time. The Feature Story in this chapter mentioned that although there once were many U.S. automobile manufacturers, only three U.S.-based companies remain today. Many of the others went bankrupt. This highlights the fact that when making a long-term loan or purchasing a company's stock, you must give consideration to a company's solvency. To reduce the risks associated with having a large amount of debt during an economic downturn, some U.S. automobile manufacturers took two precautionary steps while they enjoyed strong profits. First, they built up large balances of cash and cash equivalents to avoid a cash crisis. Second, they were reluctant to build new plants or hire new workers to meet their production needs. Instead, they asked workers to put in overtime, or they “outsourced” work to other companies. In this way, when the economic downturn occurred, they hoped to avoid having to make debt payments on idle production plants and to minimize layoffs. As a result, in the middle
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This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 201 taught by Professor - during the Spring '11 term at Montgomery.

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Solvency - Solvency Solvency ratios measure the ability of...

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