You as Overnight Auto's Independent Auditor Pending lawsuits are usually disclosed in the notes to the financial statements only if there is reasonable certainty that the defendant will incur a significant loss. Thus, Overnight need not disclose its pending lawsuit if the risk of it sustaining a material loss is remote. This is certainly an issue requiring the professional judgments of the company's management, accountants, legal counsel, and auditors.

You as a Financial Analyst Evaluating Overnight Auto ServiceYou should tell the owner that evaluating financial ratios is most useful when a basis for comparison exists. Often the basis for comparison is the performance of other companies in the same industry. You might ask the owner for financial statements of competing companies so that you can compare Overnight's performance against its peer group. In other cases, the company's past performance serves as the basis for comparison. Overnight has been in business for only one year, but in the future, its performance can be assessed by evaluating how well it has performed from one year to the next.

It is not possible to compare Overnight's relative performance against its peers from the information provided; however, the absolute level of Overnight's performance was very good. A net income percentage over 10 percent is impressive, and a return on equity of 43 percent is quite high (shareholders often expect returns in the range of 10 percent to 15 percent). Finally, a current ratio above 1:1 generally suggests the potential for a company to meet its cash obligations as they come due. Overnight's current ratio is approximately 50 percent higher than this rough benchmark.