Lesson 5: Credit Analysis

36問 • 1年前

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It is a report summarizing the financial condition or financial results of an organization's operation.

financial statement

a photograph of the financial condition or position of a particular business at a given moment setting forth its assets, liabilities & owners equity or net worth.

balance sheet

referred to as the profit-and-loss statement. It presents a moving picture of the business, showing in a summary form the sales income, costs of good sold, gross profit, operating expenses and the net profit or loss.

income statement

the process of selecting the data needed from financial statements, comparing them, determining their relationships and interpreting the significance of their relationship.

financial statement analysis

this item should comprise the total cash on hand, in banks & other financial institutions . Excluded here,a re post dated or stale checks.

cash

It represents the most liquid assets for they are merely book accounts or open accounts with customers. This item should include all unpaid claims against insolvent debtors arising from the sale of goods and services. This should be shown in the balance sheet at face value, less a valuation reserve for bad debts.

accounts receivable

this item should include only negotiable promissory notes received from solvent purchasers in temporary settlement for goods sold and delivered. Excluded here, are notes given in settlements of loans to individuals, notes covering overdrafts and notes which have been discounted, assigned or transferred.

notes and bills receivables

this item covers all sorts of goods that are to be sold in the normal course of business. It includes raw materials, goods in process and finished products to which ownership is claimed by the firm submitting the statement.

merchandise inventories

this includes short-term notes, stocks, bonds and other securities of subsidiaries or other companies held by the maker of the statement.

investments

they have no direct debt-paying power but their significance lies on the fact that they reflect the system of accounting employed by the makers of the statement.

deferred assets

this constitutes an important part of the fixed assets and are not to be sold in the normal course of business activity. They add to the stability of the business and in event of a forced liquidation, the proceeds from their sale would be applied in payment of creditor' claims according to priority.

plant, machinery & equipment

adequate allowance should be made for depreciation and since the worth of this in case of a forced sale is very low, a substantial percentage is sometimes written off by credit grantors.

furniture & fixture

this item represents the total sum owing to creditors on open account and it is advisable from the standpoint of creditors to have it segregated into amounts net due and amounts past due. Amount owing for merchandise is excluded.

accounts payable

includes: notes payable to banks; notes payable to merchandise; and notes payable to others

notes payable

ordinary mortgages represent indebtedness secured by a pledge of real estate, whereas chattel mortgages represent indebtedness secured by personal and other movable properties such as stock of goods, automobiles, refrigerator, cash registers, etc.

mortgages

in the event of forced liquidation, bondholders claims takes precedence over those of bank and merchandise creditors if the bonds are secured by specific property.

bonds

these are potential and do not become real until & unless certain contingencies occur such as: when the debtor guarantees payment of another's account; when a merchant indorses his N/R for the purpose of discounting them at the bank; by indorsing a note for the accommodation of another; and when commitment for future delivery of merchandise purchase are made.

contingent liabilities

It represents the equity of owners partners or stockholders in the business and is determined by subtracting total liabilities from total assets.

net worth

only those stocks which are actually issued and outstanding should appear in the balance sheet.

capital stock

the difference between the net worth of the business and the value of the capital stock issued and outstanding. It is the excess of book value over the amount which the liabilities and value of the capital stock issued and outstanding. A reasonably substantial surplus is usually looked upon with favor, for it indicates a safe equity.

surplus

it consist of a simple evaluation of the different items appearing on the balance sheet without reference to proportions or relationships except in the most casual manner. It is a means by which the asset items on the balance sheet are trimmed down to figures that are regarded as reasonable and conservative and the credit decision is based on the financial status of the subject revealed by the corrected amounts.

the valuation method

this shows the percentage relationship of each item in the statement.

vertical analysis

it shows the percentage change or changes of the same item and account in a comparative financial statement.

horizontal analysis

a method by which the true financial position and operating efficiency of a business can be revealed.

ratio analysis of financial statement

It is the quotient showing the relationship existing between two pertinent and relevant items on the financial statement.

ratio

It is defined as a relationship between two quantities on a firm's financial statement which is derived by dividing one quantity by another.

financial ratio

It is the most direct relationship between the company's current resources and current obligations. This ratio measures the margin of safety of the business against unforeseen events. They are measures of the company's capacity to meet its current obligations out of its liquid assets. A high current ratio is an indication that the company has enough current assets to pay its currently maturing obligations. A low current ratio may indicate a lack of cash to pay off debt. Ideal ratio is 2:1

current ratio

It measures the firm's capacity to cover its short-term obligations using only its more liquid assets. Inventories are excluded. Ideal ratio is 1:1

acid test or quick ratio

This ratio is an indication of the velocity with which merchandise moves through the business. Usually, the higher the turnover, the better the performance of the company. An increase in the size of inventory may indicate additional stocks required for an expanding business or an accumulation of merchandise as a result of falling sales. Ideal is 4-20 times.

inventory turnover

It is one-half of the sum of the beginning and ending inventories.

average inventory

This indicates the number of time average amount of receivables is collected during the period & the efficiency in collection.

receivable turnover

This ratio relates to receivable to the sales from which they arose. The collection period can be roughly compared to the credit terms extended to members/consumers and are a rough measure of the overall quality of the receivable and the effectiveness of the credit policy. Ideal is 20-60 days.

collection period ratio

This ratio indicates the debt capacity of a company. It expresses the relationship between the capital contributed by the creditors & that contributed by the owners.

debt/equity ratio

This measures how much net earnings before taxes was derived from the owner's investment in the company.

return on investment

This ratio measures the ability of the company's assets to generate income. A low rate of return on assets indicates poor performance or poor use of the assets by management.

return on assets

This ratio indicates the efficiency with which human and non-human resources are being used in the cooperative. The calculation of this ratio over time and among various similar cooperatives will indicate the effect of volume upon the cost per unit of merchandising products and services. Ideal 10-50%

operating expenses to sales

Lesson 2

mjay rabena · 33問 · 2年前

Lesson 2