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To properly assess the risks associated with loan repayment, we need to understand how the business has performed over the past several periods. This is called trending. The data needed for this process is several years of financial statements, also known as the borrower’s story about how they have managed their business activities.
We conduct financial analysis to determine the questions about “what” has changed so we can determine “why” the number changed. The explanation of the “why” is called risk identification and is the first step in making a reasoned credit decision.
Discuss role of accounting in development of financial statements.
Review financial statement construction—balance sheet/income statement.
Present financial statement analysis process.
Discuss calculation and role of ratios in financial analysis.
Be aware of difference between “accounting” for accountants and bankers.
Better understand impact of financial statements on ratio calculation.
Learn to better understand the borrower’s story about business activity.
Provide tool to ask more thorough questions about business activity.
Enhance communications of risk issues in credit memos.