Financial Statements Flashcards
Additional disclosures include
- Footnotes
- Example Footnotes
- Schedules and Attachments
- Where disclosure is made is optional
Statement of Cash Flows classifies sources and uses of cash into
- Operating Activities
- Investing Activities
- Financing Activities
Financial Statement Analysis Options and Tools
Situation: Consumer Loan
Tools?
Approach?
Tools: Consumer Loan Calculation Worksheet
Approach: Debt to Income (DTI) based upon Gross monthly income and Monthly Debt Service
Financial Statement Analysis Options and Tools
Situation: Consumer Loans for Business Purposes
Tools?
Approach?
Tools: Personal Cash Flow and CRE Loan Underwriting Worksheet
Approach: Debt to Income (DTI) based upon Monthly income (personal plus business) and Monthly Debt service (personal and business)
Financial Statement Analysis Options and Tools
Situation: Loans directly to Business (Small C&I (LTE $500M)
Tools?
Approach?
Tools: Global Cash Flow Worksheet (Tax Returns)
Approach: Global Debt Service Coverage (DSC) including Annual income (personal and business) and Annual debt service (personal and business)
Financial Statement Analysis Options and Tools
Situation: Loans directly to Business
Tools?
Approach?
Tools: Global Cash Flow Worksheet (Tax Returns)
Approach: Global DSC to include Annual income (personal and business) and Monthly debt service (personal and business)
Financial Statement Analysis Options and Tools
Situation: Loans Directly to Business (Large C&I GT $500M)
Tools?
Approach?
Tools: Business Financial Spread (by credit analyst) plus Business Loan Underwriting Worksheet plus Personal Cash Flow Worksheet or Global Cash Flow Worksheet (Guarantors)
Approach: Various Annualized Ratios based upon Business Financials including DSC and DSC based upon Annual prpoerty net property income (NOI) and Annual debt coverage plus Other ratios/items including Supportable loan amount, breakeven interest rate and breakeven vacancy
Financial Statement Analysis Options and Tools
Situation: Loans Directly to Business Income Producing or Investment Real Estate
Tools: Personal Cash Flow Worksheet or Global Cash Flow Worksheet plus CRE Loan Underwriting Worksheet
Approach: DSC based upon Annual property net property income (NOI) and Annual/ debt service plus other ratios/items including supportable loan amount, breakeven interest rate and breakeven vacancy
What are Financial Statements
a report card of the financial effects of decisions made by management.
What are the three methods of accounting?
- Cash basis
- Tax basis
- Accrual basis
What are the attributes that describe Accrual Accounting?
- Transactions will be measured by historical cost
- Revenues will be recognized when earned
- Expenses will be matched with the revenues they produce
What is a complete set of financial statements?
- Accountants Cover Letter (if applicable)
- Balance Sheet
- Income Statement (P&L Statement)
- Reconciliation of owner’s equity
- Statement of Cash Flows
- Footnotes
Structure and Purposes of Financial Statements
Balance Sheets
- Statement of financial position at a point in time
- Summarizes resources (assets) and claims against resources (liabilities and net worth)
- Reflects basic accounting equation A=L+E
- Assets and Liabilities are classified into current and non-current
Source Balance Sheet Information Tax Forms
Schedule L of federal Tax return
Structure and Purposes of Financial Statements
Income Statement
- Profit and Loss Statement or Statement of Earnings
- Reports on the company’s economic performance during a period of time
- Reflects the sales or revenues minus expenses equals profits (or loss)
- Generally in a multi-step format
Source Income Statement information Tax Returns
Forms 1120, 1120S or 1065
Structure and Purposes of Financial Statements
Reconciliation of Owners Equity (or Net Worth)
- Sometimes shows as an extension of income
- Dividends Disclosed
3.
Structure and Purpose of Financial Statements
Statement of Cash Flows
Classifies sources and uses into
1. Operating Activities
2. Investing Activities
3. Financing Activities
Starts with net income, adds back depreciation, then
Focuses on changes in balance sheet accounts
Structure and Purposes of Financial Statements
Additional Disclosures
- Footnotes
- Example Footnotes
- Schedules and Attachment to the tax return
- Where disclosure made is optional
Generally Accepted Accounting Principles abbreviation
GAAP
Generally Accepted Accounting Principles
Three Broad Standards
- Conservatism
- Consistency and comparability
- Materiality
Accrual Methods Compared to Others
Three Broad Standards
- Conservatism
- Consistency and comparability
- Materiality
Conservatism
- When cost/benefit analysis or industry practice can’t resolve an issue or accounting method choice…
- When in doubt, chose the solution that will least likely overstate assets or income
Consistency and comparability
- Principles will be applied consistently from period to period
- Departure/choices will be clearly disclosed
Materiality
- Any item that would have an effect on a decision maker
2. For other items show if plus or minus 10% of a larger category
Types of Unaudited Financial Statements
Review Compilation Company Prepared Cash Basis Income Tax Basis
Audited Statement types
Unqualified
Qualified
Adverse
Going Concern
Basis of presentation
Single entity
Multiple entities
Factors for the Timing and receipt of financial statements
Business fiscal year
Business or Guarantor Tax Return or other
Time Lag for preparation
Getting on correct cycle
Importance of interim statements
Reveal seasonality
Track performance against budget or plans
Show cash flow and peak borrowing needs
Reveal problem loans early warning signals much earlier
