Question

C. income b. You are employed in the lending department of a large bank. You are trying to determine if you should lend to a potential customer. If you do make the loan you are especially concerned that the company will have sufficient collateral in the event that it is unable to repay the loan. You wish to invest in a firm that provides you with a steady source of income. You especially want a firm that pays out a large part of its net income as dividends. Stalemont of SE d. You are trying to determine if a particular firm will have sufficient cash flow in order to keep expanding without relying too heavily on external sources of financing. Required Determine which of the financial statements contains the most useful information to help in your deci- sion. Explain what information you used from each statement to help you make your decision.

Answer 1

(b) Balance sheet: The balance sheet will provide a better view of the assets held by the company on a given date. The amount of assets which can be held as collateral can be determined by the balance sheet. In such a way, by taking the value of collateral as the base, we can decide on the amount which can be lended as a loan to the said company.

(c) Statement of stockholders Equity: The two major components here are " net income" and "dividends paid", Hence, you can use this statement to determine which firm pays out a larger part of its net income as dividends.

(d) Cash flow statement: As all the other financial statement work on accrual basis, cash flow statement is the best measure to determine whether the firm has enough cash on hand, or it future cash generating abilities, for expansion, without relying too heavily on external financing.