A businesses financial solvency and CPA Letters
Financial solvency refers to an individual or entity's ability to meet long-term financial obligations, indicating financial stability by having sufficient assets to cover liabilities without selling core assets. It’s often assessed using ratios like debt-to-equity or interest coverage.
Certified Public Accountant (CPA) letters are documents issued by licensed CPAs to verify financial information, such as income, net worth, or solvency, for third parties like lenders, landlords, or government bodies. These letters enhance credibility in financial transactions, often required for loan approvals, rental applications, or tender submissions, especially for self-employed individuals or businesses. Common types include:
Income Verification Letters: Confirm an individual’s or business’s income based on tax returns or financial statements, used for loans or leases.
Solvency Certificates: Attest to financial stability, often issued with bank support, for contracts or large transactions.
Comfort Letters: Provide assurance of financial capability without legal commitment, used in investment offerings or loan applications.
Key Documents and Metrics CPAs Review
Financial Statements:
Balance Sheet: To evaluate assets, liabilities, and equity, ensuring assets exceed liabilities for solvency.
Income Statement: To verify revenue, expenses, and net income, especially for income verification letters.
Cash Flow Statement: To assess liquidity and ability to meet ongoing obligations.
Statement of Retained Earnings: To understand profit retention and financial stability.
Tax Returns:
Recent personal or business tax returns (e.g., IRS Form 1040, 1120, or 1065) to confirm reported income, deductions, and tax compliance.
Typically, CPAs review 1-3 years of returns for consistency and accuracy.
Bank Statements and Account Records:
To verify cash balances, savings, and liquidity.
Evidence of consistent cash flow to support claims of financial stability.
Debt Schedules and Loan Agreements:
Details of outstanding loans, credit lines, or other liabilities to assess debt-to-equity or debt-to-asset ratios.
Terms of repayment to evaluate impact on solvency.
Payroll Records and Pay Stubs:
For individuals, especially self-employed, to confirm income sources and stability.
W-2s, 1099s, or other income documentation for accuracy.
Accounts Receivable/Payable Ledgers:
For businesses, to evaluate incoming revenue and pending obligations.
Aging reports to assess collectability of receivables or overdue payables.
Supporting Documentation:
Contracts, leases, or purchase agreements relevant to the transaction (e.g., for loan or rental applications).
Proof of assets (e.g., property deeds, investment statements, or appraisals) to verify net worth or collateral.
Financial Ratios and Metrics:
Current Ratio: Current assets ÷ current liabilities to assess short-term liquidity.
Debt-to-Equity Ratio: Total debt ÷ total equity to evaluate leverage.
Interest Coverage Ratio: Earnings before interest and taxes (EBIT) ÷ interest expense to gauge ability to service debt.
Net Worth: Total assets minus total liabilities for solvency confirmation.
