Question

You work as a commercial loan officer in a local bank. The president of a small-to-medium sized fast-food restaurant chain, with 250 employees in five locations, comes into your bank and asks for a business loan of $400,000 to help fund his expansion plans for building two additional restaurant locations.

Question(s):

What would be your concerns as the loan officer?

What questions would you ask and what financial documents might you request of him/her?

Chapter 3 discusses differences between Accrual basis and Cash basis accounting; and why Accrual basis accounting is important to practice. Explain the importance of Accrual basis accounting and how you might possibly verify that this company is following Accrual basis accounting.

Answer 1

Question 1:

As a Loan officer, I would ask the following Questions:

a) I will enquire about his credit rating?
b) I will ask if there is existing Loan/Outstanding/overdue loan.?

c) Ask him about the repayment?

d) ask about the motgage/ guarrantor?

e) I enquire Do his business have the ability to make the payments required under this loan?

Question2:

The Documents I request :

Following are the documents needed while applying loan as per statutory Requirements:

a) ID Proof

b) Address Proof

c) Income Proof

d) Financial Documents: ITR,Balance sheet,P&L,Cashflow Statements of 3 years.

e) Business Ownership Proof.

Question3:

Importance of Accrual concept:

1) Makes Financial Statements Accurate and Reliable.

2) It satisfies GAAP and IFRS requirements.

3) Increases usability of financial statements.

4) It focuses on estimated revenue and Expenditure.

Question 4:

We can Possibly Verify that the company is following the Accrual Basis of Accounting if:

1) The Company is recording their sales during the invoice itself and not during the receipt of cash.

2) If the Cash received or paid is far less than expected.