Question

What are the inter-relationships between the Balance Sheet and Income Statement? Incorporate in your discussion the differences/characteristics between the two and how the information you derive helps in the lending decision. You can also discuss the financial ratios used in your underwriting analysis.

Answer 1

Balance sheet and income statements are interdependent upon each other because various figures from income statements are carried onto the balance sheet and income statement are often prepared by looking into the figures of the balance sheet also so they are interdependent.

Balance sheet is record of the Asset and liabilities of the company and it is providing the status of a company at a given point of time whereas income statement is providing the income related information and the profit making ability of the company.

The profits which are made in the income statements are carried onto the financial statement as balance sheet as cash and other income and profit so they are being the part of the company's overall structure of cash and surplus. Whereas similarly income statement is dependent upon balance sheet for a whole lot of figures and they are interdependent in nature.

These two are also helping in deriving lending decision because they will be reflecting the status of a company from a financial perspective and they will be representing the financial ability of the company to repay the loans.

there are various financial ratios which can be interpreted from the income in the balance sheet and these are often profitability related ratios used mostly profitability related ratios are often reflecting the use of asset in order to increase the efficiency and generating higher profits and those could be reflective of a better organisation so income and balance sheet are interdependent upon each other.