Why is the liabilities section of the balance sheet of primary significance to bankers?

Expert Solution

Answer). Of all the financial statements issued by companies, the balance sheet is one of the most effective tools in evaluating financial health at a specific point in time. Consider it a financial snapshot that can be used for forward or backward comparisons.
Liabilities are usually considered short term (expected to be concluded in 12 months or less) or long term (12 months or greater). They are also known as current or non-current depending on the context. They can include a future service owed to others; short- or long-term borrowing from banks, individuals or other entities; or a previous transaction that has created an unsettled obligation. The most common liabilities are usually the largest like accounts payable and bonds payable.

As a lender of money, the banker is interested in the priority his/her claim has on the company's assets relative to other claims. Close examination of the liability section and the related footnotes discloses amounts, maturity dates, collateral, subordinations, and restrictions of existing contractual obligations, all of which are important to potential creditors. The assets and earning power are likewise important to a banker considering a loan.

ekkarill92 answered 1 year ago

Why is the liabilities section of the statement of financial position of primary significance to bankers?

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