Fiscal Solvency is the ability of a governmental entity to meet its long-term debts and financial obligations. Solvency can be an important measure of financial health, since its one way of demonstrating a government’s ability to manage its operations into the foreseeable future. The quickest way to assess a government’s solvency is by checking fiscal solvency ratios.
Fiscal solvency ratios are a key metric used to measure a government’s ability to meet its debt obligations and is used often by prospective lenders. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-term liabilities. There is a difference between solvency and liquidity. Solvency is a long-term measure, while Liquidity is a short-term measure.
Liquidity relates more to short-term cash flow, while solvency relates more to long-term financial stability. Simply put, liquidity is the value of all its assets. Solvency ratios are used to examine the ability of a government to meet its long-term obligations. The ratios are most used by current and prospective lenders. The ratio compares an approximation of cash flows to liabilities and is derived from the following ratios:
(1) Current Ratio, (2) Operating Ratio, and (3) Net Asset Ratio.
To successfully complete this assignment, please refer to the assignment resource: Assignment Resource: Fiscal Solvency Assignment Guide.
For this Assignment, you will need to compute, and create tables to analyze:
1) Current Ratio
2) Operating Ratio
3) Net Asset Ratio
Then, using the tables and charts, you will write an 6-8 double-spaced research paper analyzing:
1) The degree of solvency of Bay City, Texas
2) Solvency methods and techniques and why they are important for governments to use and their advantages and disadvantages.
3) How Solvency Helps Financial Issues
4) Solvency vs Liquidity