CCP Intermediate Level

Financial Statements Analysis for Credit Managers cheat sheet

Every chapter's key points, formulas and definitions on one page, for the last week before the exam. Each heading links to the chapter that explains it.

Financial statement analysis for lenders

Financial reporting produces the statements; financial statement analysis reads them for a decision. For a credit analyst the decision is whether the borrower can and will repay, on what terms, and what to watch afterwards.
The audit gives reasonable assurance, not a guarantee: read the type of opinion first, because a qualified, adverse or disclaimed opinion, or a going concern paragraph, changes how far every later figure can be trusted.
The analyst draws on financial sources (the five statements and their notes) and non-financial ones (constitution, CR12, beneficial ownership, board resolutions, management commentary, sustainability and integrated reports, ratings, regulatory filings, the press, industry benchmarks).
Analysis runs top down (economy, industry, company) or bottom up (company first), and always through the same steps: purpose, data collection, processing, analysis, recommendation and periodic review.

Key terms

Unmodified opinion: The auditor concludes that the statements give a true and fair view in accordance with the framework. The usual and expected outcome.
Qualified opinion: The statements are fairly presented except for a specific matter that is material but not pervasive, or on which the auditor could not obtain enough evidence. The analyst must find out what the matter is and adjust for it.
Adverse opinion: Misstatements are material and pervasive: the statements as a whole do not give a true and fair view. A lender should not rely on them.
Disclaimer of opinion: The auditor could not obtain enough evidence to form an opinion at all, and the possible effects are material and pervasive. In effect there are no audited figures.
Emphasis of matter: A paragraph drawing attention to something properly disclosed in the statements that is fundamental to understanding them. The opinion is not modified, but the matter deserves the analyst's attention.
Material uncertainty related to going concern: A paragraph stating that events or conditions cast significant doubt on the entity's ability to continue as a going concern. For a lender this is one of the most important sentences in the whole annual report.
Statement of financial position: What the entity owns and owes at the reporting date: the basis for liquidity, leverage and net worth.
Statement of profit or loss and other comprehensive income: Performance over the period: revenue, costs, margins and the earnings available to service debt.
Statement of cash flows: Where cash came from and went, by operating, investing and financing activities: the closest the statements come to repayment capacity.
Statement of changes in equity: Movements in share capital, reserves and retained earnings, including dividends paid and new shares issued: it shows whether owners are putting money in or taking it out.
Notes to the financial statements: Accounting policies, judgements and estimates, borrowings and their security, contingent liabilities, commitments, related-party transactions and events after the reporting date. Much of what a lender needs is only in the notes.

The rest of the sheet covers

Quality of the statement of profit or loss
Quality of the statement of financial position
Quality of the statement of cash flows
Analysis tools and techniques
Credit risk assessment
Financial distress
Working capital management
Financial reporting quality
The credit analyst's report
Worked examples
Exam technique and revision
Glossary