Finally the ratio of liabilities to sales is an indicator of managements use of

Finally the ratio of liabilities to sales is an

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Finally, the ratio of liabilities to sales is an indicator of management's use of financial leverage. These ratios are affected by changes in the numerator or the denominator or both; a financial or credit analyst would want to know the source of any change in a ratio's value. These ratios only measure problem symptoms; you must dig deeper to find the cause. 17-5. What are contingent liabilities, and why might they be important in deciding whether to approve or disapprove a business loan request? Contingent liabilities include such pending or possible future obligations as lawsuits against a business firm, and warranties or guarantees the firm has given to others regarding the quality, safety, or performance of its product or service. Another example is a credit guaranty in which the firm may have pledged its assets or credit to back up the borrowings of another business, such as a subsidiary. Environmental damage caused by a business borrower also has recently become of great concern as a contingent liability for many banks because a bank foreclosing on business property for nonpayment of a loan could become liable for cleanup costs, especially if the bank becomes significantly involved with a customer's business or treats foreclosed property as an investment rather than a repossessed asset that is quickly liquidated to recover the unpaid balance on a loan. Loan officers must be aware of all contingent liabilities because any or all of them could become due and payable claims against the business borrower, weakening the firm's ability to repay its loan to the bank. 17-6. What is cash-flow analysis, and what can it tell us about a business borrower’s financial condition and prospects? A cash flow statement shows the changes in a business firm's assets and liabilities as well as its flow of net profit and noncash expenses (such as depreciation) over a specific time period. It shows where the firm raised its operating capital during the time period under examination and how it spent or used those funds in acquiring assets or paying down liabilities. From the perspective of a loan officer the cash flow statement indicates whether the firm is relying heavily upon borrowed funds and sales of assets. These are two less desirable funding sources from the point of view of lending money to a business firm. In contrast, loan officers usually prefer to focus upon cash flow - whether the firm is generating sufficient cash flow (net income plus noncash expenses) to repay most of its debt. The Statement of Cash Flows shows how cash receipts and disbursements are generated by operating, investing, and financing activities. 17-7. What is a pro forma statement of cash flows, and what is its purpose?
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A pro forma statement of cash flows is useful not only to look at historical data in a Statement of Cash Flows, but also to estimate the business borrower’s future cash flows and financial condition and its ability to repay the loan.
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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