Question

During December, this company's cash balance has fallen from $200,000 to $65,000. Does it appear headed for insolvency in the near future? Explain your reasoning.

Essay

Answer 1

If during December, the company's cash balance has fallen from $200,000 to $65,000, then it doesn't appear headed for insolvency in the near future, because the balance may change next month. But if the cash balance stays low for several month, and the net cash flow is negative, then the problems may appear.