Question

What aspect of company’s financial statements do bank examine carefully

Please explain carefully

Answer 1

The income statement breaks down the company's sales proceeds and expenditures to show the source of net profit for the company. The income statement allows the bank to answer questions such as how expensive the product or service is to deliver, as a percentage of the selling price, or how much the fixed costs eat into profits, such as rent. The income statement shows whether the company is delivering a premium product with a high profit margin but relatively low volume, or pursuing a discounted price / high volume strategy. These show whether the profit figures will be sustainable in the coming quarters and years, given the expected shifts in the competitive landscape and the wider economy

The bank also studies the cash flow statement, in addition to the income statement. This statement details both the sources and the outflows of cash inflows. Cash in and outflows during a given financial period may be consequences of long-standing actions. Repayment of a loan taken out years ago will result in substantial cash outlay and will be highlighted prominently in the cash flow statement. It is, however, neither a profit nor a loss, and will not be found on the statement of income. Therefore the bank has to consider carefully how the company used its cash resources to understand if it will have the cash to repay the loan.

The balance sheet of an enterprise is essentially a breakdown of what it owns and owes. All assets are on the right hand side of the balance sheet, including land, equipment, office and factory buildings, cash, and so on. Liabilities are on the right side of a balance sheet, such as loan obligations to other banks, payables to suppliers for items purchased on credit or upcoming tax payments. The bank needs to be aware of these details, because if profits fail to provide sufficient cash to pay the loan, the proceeds from selling the assets are the only source that can be exploited.