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The Financial Statement as a Source of Credit Information

statements, liabilities, borrower, time, low, methods and audit

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THE FINANCIAL STATEMENT AS A SOURCE OF CREDIT INFORMATION The Nature of a Financial Statement A financial statement is a tabular display of the assets and liabilities of a person, firm, association, or corporation, the assets and liabilities being itemized, in more or less detail, according to the subject's bookkeeping methods and its willingness to give the outsider knowledge of its real condition. It should be accom panied by a profit and loss statement, covering its progress over a period of time, and statistics as to annual sales, turnover, profits and dividends, insurance, etc.

The statements are usually prepared by the borrower, and are supplemented and corroborated, if it is thought advisable, by evidence gleaned from independent and indirect sources by the credit department.

In many instances it is necessary to require a borrower to furnish an audited statement. The preparation or proof of a statement by an outside auditor lessens the danger of fabricated statements, but such a course is too expensive and bothersome for small loans. Strong institutions, which run their affairs in an open way and which wish to borrow freely, submit readily to the independent audit of their accounts, but small secretive concerns balk at the idea.

An audit or examination by a credit man is often very bene ficial to the borrower. The manner in which the statement is made up indicates largely the methods employed by the concern making it. Some statements are full and explicit, while others are garbled and ambiguous. The latter sort causes suspicion that slipshod methods are in use or that important facts are being concealed. Concealed facts are brought to light by analysis, and skill in reading between the lines is an essential attribute of the credit dispenser. Men sometimes lead themselves to believe that they are worth more than they really are, but the credit man or auditor, having no personal interest in the affairs of the maker of the statement, is able to view the proposition in an unbiased manner and scale the figures to a point which may closely repre sent a man's actual worth. An analysis will sometimes lead to the discovery of conditions which it is well for the borrower to know. Men may make an incorrect statement with no intention to de ceive anyone, but the lack of knowledge of important business customs can be remedied by co-operation.

The banker also finds the audit of statements necessary, not because he questions the honesty of the borrower, but because of the latter's bookkeeping methods, as his manner of making in ventories, valuing his accounts receivable, etc., makes it difficult to get a correct impression of the borrower's condition. The audit even may not be sufficiently thorough to show the exact condition. To be complete, the accounts should be checked very closely. More and wider physical tests should be made of the inventories; particularly in manufacturing concerns should a close check be kept on materials, raw and in process, and an appraisal of the company's plant, machinery, fixtures, etc., made by an appraising company of recognized standing.

The custom of making a statement when a concern's indebted ness is at its lowest point has become quite common, especially with establishments which sell their paper through note-brokers. While in some respects this is all right, in certain others it is manifestly unfair. It often occurs that shortly after a statement of this kind is made, a concern will issue a large amount of paper and incur liabilities for merchandise, thus increasing its total liabilities to such an extent that they almost equal the quick assets. The practice of making statements at the time of low liabilities is followed in many instances in order to make an at tractive statement, the ability to clean up liabilities or liquidate to a low point being thereby implied. But it would be far more satisfactory to the credit dispenser if statements were made at the time when the indebtedness is at its maximum as well as when it is at its minimum. In practically every failure of a concern which has sold its paper in the open market it is found that its statements have been timed to periods of low indebtedness. Many concerns have no desire to make a statement at this time of low ebb, but will make it at any time of the year suitable to the convenience of their business. Others prefer to make a statement when their debts are at a maximum, in order to deceive no one.

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