Question:Accounting in Action: CM Corporation (CMC)(
Is the decrease in current ratio and quick ratio and increase in debt-to-equity ratio from 2013 to 2014 alarming? If and what is the risk external financers are facing if they invest in the company? Is the risk worth the investment or no? and why? Base on financial ratios calculated from CMC’s 2013 and 2014 financial statements (e.g., its current ratio, quick ratio, debt-to-equity ratio and changes in these ratios etc.).
CM Corporation (CMC) was founded in 2000 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as “entrepreneurial geeks,” met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In January 2015, CMC hired you as an accounting intern.
Lately Conner and Martin have been working with “radio frequency identification” (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries. One of the most basic applications is tracking manufacturing components; if tagged components “go walking” (if employees attempt to take them), companies can easily track and find them. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terroristsand others. To date, CMC’s cash flow from sales and services has adequately funded its operations.
CMC anticipates growth potential for its products. As a result, it is planning to go to the market with a
new common stock issue
at the end of 2016. Many of the issues you will address in this continuing problem involve choices that are affected by preparing for this anticipated stock issue.
To familiarize you with the company’s operations, Conner and Martin have provided an unadjusted trial balance from the end of last year (2014) on an Excel spreadsheet.
- Attachment 1
- Attachment 2