Question

In: Accounting

What aspects of a business firm's financial statements do loan officers and credit analysts examine carefully?...

What aspects of a business firm's financial statements do loan officers and credit analysts examine carefully? Support your answer with relevant example drawn from the industry, or research literature from academia.(Your answer for each question should be between 500 to 700 words)

Solutions

Expert Solution

Ans.

Loan officers and credit analysts examine the following aspects of a business firms's financial statements:

a)Control over expenses? Key ratios here include cost of goods sold /net sales:selling ,administrative and other expenses/net sales:wages and salaries /net sales interest expenses on borrowed funds/net sales: over head expences/Net sales: Depreciation expences /Net sales and taxes /Netsales

b)Operating efficiency? Important ratios here are net sales /Total assets,Annual cost of goods sold divided by average inventory levels, net sales/ net fixed assets and net sales/ accounts and notes recievable .

c)Marketability of a product ,Service , or skill? Key ratio measures in this area are the gross profit margin ,or netsales less cost of goods sold to net sales, and the net profit margin,or net income after taxes to net sales

d)coverage? Important measures here include interest coverage (such a income before interest and taxes divided by total interest payments),coverage of interest and principle payment ( such a earnings before interest and taxes divided by annual interest payments plus principle payments adjusted for the tex effect),and the coverage of all fixed payments(such as income before interest, taxes and lease payments divided by interest payments plus lease payments).

e)Profitability indicators ?Key barrometers in this area can include such ratios as before tax net income divided by total assets, net worth,or sales ,and after-tax net income divided by total assets(or ROA )net worth (or ROE)or profit margin

f)Liquidity indicators? Imprtant ratio measures here usually incude the current ratio (current assets divided by current liabilities),and the acid -test ratio (current assets less inventoried divided by corrent liabilities)

g)Leverage indicators? Ratios indicating trends in the dimension of business performance usually include the leverage ratio (total liabilities/ total assets or net worth) ,the capitalization ratio (of long -term debt divided by total long -tem liabilitied and net worth) , and the debt -to- sales ratio (of total liabilities divided by netsales)

One problem with employing ratio measures of business performance is that they only reflect symptoms of a possible problem but usually dont tell us the nature of the problem or its causes .Mangement must look much more deeply into the reasons behind ant apparent trend in a rtatio . Moreover ,anytime the value of a ratio changes the change could be due to a shift in the numerator of the ratio ,In the denominator , or Both.


Related Solutions

. What aspects of a business firm's financial statements do loan officers and credit analysts examine...
. What aspects of a business firm's financial statements do loan officers and credit analysts examine carefully? Support your answer with relevant example drawn from the industry, or research literature from academia. Your answer for question should be between 500 to 700 words.
What aspect of company’s financial statements do bank examine carefully Please explain carefully
What aspect of company’s financial statements do bank examine carefully Please explain carefully
Financial analysts that examine financials often refer to "quality earnings"? What are some signs that may...
Financial analysts that examine financials often refer to "quality earnings"? What are some signs that may help you discern if you are examining a company with "quality earnings"?
Discuss the the aspects of the financial manager's role in the firm's cash and liquidity management,...
Discuss the the aspects of the financial manager's role in the firm's cash and liquidity management, and the components of the firm's policies regarding liquidity. Include a discussion regarding the firm's policies when it has excess cash, and the alternatives the firm might consider when it has excess cash. 3 paragraphs
Discuss the the aspects of the financial manager's role in the firm's cash and liquidity management,...
Discuss the the aspects of the financial manager's role in the firm's cash and liquidity management, and the components of the firm's policies regarding liquidity. Include a discussion regarding the firm's policies when it has excess cash, and the alternatives the firm might consider when it has excess cash.
How financial analysts classify the ratios used during an analysis of a company's financial statements. What...
How financial analysts classify the ratios used during an analysis of a company's financial statements. What does each type of ratio tell us and provide a single example of each and why it is classified in that manner.
2. There are 4 financial statements available for the financial analysts to use in determining the...
2. There are 4 financial statements available for the financial analysts to use in determining the value of a company’s stock. Discuss completely which financial statement you believe provides the most accurate indication of value for an investor? Which financial statement provides the least effective valuation information? Use examples from a company you have analyzed to underscore your point
1. When assessing a company's credit risk: Multiple Choice Analysts use only financial ratios and do...
1. When assessing a company's credit risk: Multiple Choice Analysts use only financial ratios and do not need to review the statement of cash flows. Analysts use only the statement of cash flows. Both liquidity and solvency must be reviewed. The assessment involves looking only at the operating and cash conversion cycles. 2.The accounts receivable turnover ratio Multiple Choice is not useful in determining changes in customer payment patterns. uses total sales and not just credit sales in the computation....
What four financial statements can be found in a​ firm's 10-K​ filing? What checks are there...
What four financial statements can be found in a​ firm's 10-K​ filing? What checks are there on the accuracy of these​ statements? Every public company is required to produce quarterly and annual financial statements. Those statements​ are:  ​(Select all the choices that​ apply.) A.The statement of financial position. B. The income statement. C. The statement of cash flows. D. The statement of​ stockholders' equity. E. The statement of​ stockholders' liabilities. What checks are there on the accuracy of these​ statements?  ...
What role do financial analysts’ earnings expectations play in the quality of earnings?
What role do financial analysts’ earnings expectations play in the quality of earnings?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT