CCP Intermediate Level

Financial Statements Analysis for Credit Managers flashcards

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In order, what are the steps in analysing a borrower's financial statements?

1. Define the purpose and context of the analysis. 2. Collect the data. 3. Process the data (spread, adjust, compute). 4. Analyse and interpret it. 5. Communicate the recommendation. 6. Review periodically.

What is the difference between common-size (vertical) and horizontal analysis of the statement of profit or loss?

Vertical: each line as a percentage of revenue for the same year, showing the cost structure and margins. Horizontal: each line's change on the base year, in shillings and per cent, showing growth. Read together, they show where the margin went.

What is tangible net worth, and why does a lender use it?

Equity less goodwill and other intangible assets. It is the loss-absorbing cushion a lender can count on, because intangibles rarely have value apart from the business itself.

What are the three classes of cash flow under IAS 7, and what does each tell a lender?

Operating: the cash the business itself generates, the first source of repayment. Investing: what it spends on long-term assets to stay in business and grow. Financing: how the gap was filled, by shares, loans, repayments and dividends.

What are swing factors in a lending decision?

The few assumptions in a projection to which the outcome (cash flow, cover) is most sensitive, such as sales volume, price, gross margin, the main input cost, working capital days, exchange rates and interest rates. The lender tests them in sensitivity analysis and sets covenants and monitoring around them.

What are the five Cs of credit?

Character: will the borrower pay? Capacity: can it pay from its cash flow? Capital: how much of its own money is at risk? Collateral: what can be recovered if it does not pay? Conditions: what outside forces affect repayment?

State the original Altman Z-score and its zones.

Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5. X1 working capital / total assets; X2 retained earnings / total assets; X3 EBIT / total assets; X4 market value of equity / total liabilities; X5 sales / total assets. Above 2.99 safe; between 1.81 and 2.99 grey; below 1.81 distress.

How is the cash conversion (cash operating) cycle calculated?

Inventory days + receivables days - payables days. It is the number of days the business must finance its own trading; a shorter cycle needs less borrowing.

What is the difference between conservative and aggressive accounting?

Conservative: choices that understate profit and assets now (generous allowances, short useful lives, costs expensed), with higher profit later. Aggressive: choices that overstate profit and assets now (early revenue, long useful lives, costs capitalised), with lower profit or a write-off later. Aggressive accounting is the lender's greater danger.

What are the main sections of a credit analyst's report on a corporate borrower?

Executive summary; background and purpose; management and governance; industry and business environment; financial analysis; projections and repayment capacity; security; risks and mitigants; recommendation and terms.

How does financial reporting differ from financial statement analysis?