Question

"Compensation and Lending Decisions" Please respond to the following: DQ #1 Compare and contrast compensation plans, such as restricted stock and stock appreciation rights, indicating the key differences with the accounting treatment. Determine the option that would have the least impact on a company's earnings. Recommend the choice that is the most advantageous to an employee. Support your position with examples. DQ #2 Given the current regulatory environment for financial institutions, analyzing financial statement information is an important process and at the same time, the massive amount of information that creditors have to sort through can become unwieldy. Review the financial ratios in the text, and choose three or four that creditors would mostly likely use to make their lending decisions. Indicate a rationale for choosing each ratio. Discuss at least three ways that management might manipulate the financial data to guarantee that the lending decision will be made in its favor. Provide specific examples. DQ #3 Stakeholders of a company must be aware of the limitations of relying on any specific ratio. Select any two ratios and describe some concerns a user should have regarding the use of these ratios in making a decsion. DQ #4. Financial leverage is generally defined as the use of borrowed funds to increase profits. Financial risk is defined more broadly to include the risk of default. What is the relationship, if any, between financial risk and financial leverage? Why could the calculation of a "Gearing Ratio" be an indicator of financial failure?

Answer 1

Q-1) Restricted compensation plans if you noticing interested in a contract that says you can’t put up for sale or transmit your stock in anticipation of they are empowered in more than a confident sum of time owing to this a little workers end up contain to surrender their stock since they didn’t provide in them since a definite goal was not meet in occasion stock appreciation rights compensation plans relates can appreciation the stock plan value and it can reach the target fixed It is advantages for the employees.

Q-2) the three main financial ratios that creditors use for lending purpose is that (a) leverage ratio or debt ratio (b) loan to value ratio (c) debt service coverage

(a)Debt ratio:   total debt/total assets

This ratio helps to evaluate company debt levels suppose if debt ratio indicates more than 1, the company has more debt than assets when the ratio is higher it implies greater financial risk the companies which are capital intensive business such as utilities and pipelines have much higher debt ratios.

(b)Loan value ratio: total loan/collateral value

Most creditors want the value of collateral value to be higher that the loan amount the creditors will look into these ratios to see how much of space they have if the business default on loan and the bank takes upon the collateral for a value higher enough to recover the entire balance of loan.

(c) debt service coverage ratio: annual net income/ annual debt service

This ratio is very important when loan is taken it implies the terms of payment of debts to the creditors it will help the creditors to determine the level of leverage they have in the loan this will help the creditors determine that how many times the loan payments can be made with the net income when more the value more the credit repayment viability for the bankers and creditors.

The important 3 ways that the companies tries to manipulate the financial ratios are:

1)revenue are recorded prior to realization

2)expenses are delayed for the current period

3)increasing the income with more of onetime gains

Even when the completion of service companies tend to record the revenue prematurely which will increase the revenue for the company the financial statements are distorted due this improper recording of revenues for a reason might to present attractive financial statement when pursuing for loan from bankers. When expense are delayed the profit tends to remain the same the companies by various methods like capitalizing operating expenses and moving them to balance sheet, amortizing cost slowly impairment of assets are not taken into account. To suddenly boost the revenues of companies they tend to sell off their assets and take the proceeds as revenues and enter in income statement which will increase the profits of the business in the current year moreover the companies classify income from investments as revenue which will boost the earnings of company