Usage of Financial Statements in Business Decisions

Use of Financial Statements in the Determination of Creditworthiness
Name
Institutional Affiliation
Question 1: Explain to Yolanda Tovar why a set of financial statements (income statement, statement of owner’s equity, and balance sheet) would be useful to you (Loan officer) in evaluating the loan request.
Response
The evaluation of the financial statements in the income statement, report of owner’s equity, and the balance sheet are critical in the loan evaluation request as explained below:
Income Statement: the statement shows how profitable a firm is or the loss incurred by a firm in a financial period. The report is vital in assessing whether to give or decline a loan request as it tells the assessor whether the borrower has enough profits to cover the loan.
Statement of Owner’s equity: the statement shows the capital balance arrived at by adding the net profit to the opening capital balance (Sorak & Urosevic, 2014). The report shows how much owners capital is invested in business compared to the liabilities.
Statement of financial position: the balance sheet shows the assets and liabilities owned by a firm and party. They help the loan officer in the calculation of liquidity by use of the following ratios: debt to assets ratio, debt to equity ratio, leverage ratios and so on. The proportions are pertinent in the sanctioning or declining of the loan request.
The ratios are therefore crucial for decision-making of the loan assessor on whether or not to give the loan.

The proportions portray the financial position and performance of a business and the ability of the firm to repay the credit lies with the statements (Sorak & Urosevic, 2014).
Question 2: The possible adjusting entries that might be necessary before an accurate set of financial statements could be prepared:
Response
Some of the entries that may require to be adjusted include the omitted depreciation accounts (the trial balance does not include a depreciation slot yet it has long-term depreciable assets). Secondly, the entries relating to outstanding expenses like insurance prepaid accounts, etc.
Question 3: What other considerations or information would be required before deciding on loan request?
Response
For a loan request to be approved or declined, the following considerations need be checked:
a) Check the ratio of the debt to equity ratio and notice that more obligations than equity are a prerequisite for a risky borrower while the opposite is true.
b) It is also essential to check the existing loans and the repayment schedules of the debts. It is important to note whether the loans and interest from the current loans have been paid in time, and if so, the ability of the firm to take on another loan.
c) The business goodwill regarding how many returning customers the business has and how improved the net worth is experienced.
Reference
Sorak, L. & Urosevic, S. (2014). Use of financial indicators in the creditworthiness. Economics management information technology journal, Vol. 2 (4): pp. 194-201