Financial Statement School: Recent Comments

Comment on Accounts Receivable

2009-06-15T10:47:38Z

Accounts that are due every thirty days are also known as Net30 accounts. It simply means that the wholesaler or vendor provides credit to its customer for 30 days period. Many times there is also a credit limit as wholesalers want to keep the risk factor as little as possible. If the account reaches the credit limit before 30 days, the customer has to make a payment to make new purchases. If the customer makes these payments in a timely fashion, does not have over due invoices and does not have a so-called "problem account" then, the creditworthiness of the account is re-evaluated and the credit limit is increased over a period of time. But if the account remains unpaid or is late on payments, the business will suffer. Therefore, it is very important to be able to schedule payments in a timely fashion.

Comment on Cash Basis versus Accrual Basis Accounting

2009-06-11T14:48:26Z

This is very good information for people who are learning the basics of accounting. Many business professionals need these insights to be able to create a functional and manageable business model, and accounting is a key part of it. It can make it or break it for the business. Moving forward, in my personal accounts i like to deal with it Cash Basis but for business, Accrual based accounting is a very good option when you need to get an overview of what's going on. However, it cannot replace the importance of exactly how much you have in hand to play with.

Comment on Traditional Debt Service Coverage used by Banks

2008-12-19T17:33:53Z

You'll also find more information about debt service coverage on my other website, commercialloananalysis.com.

Comment on Traditional Debt Service Coverage used by Banks

2008-12-19T01:20:39Z

I train lenders on tax return analysis. DCR comes up and is frequently calculated based on tax returns.

The available amount on an operating line of credit is not something you can find on a tax return so you'll need additional information from your borrower.

Most lenders in my experience base the denominator on the current portion of long-term debt and interest-only on available lines of credit, as if they were fully advance all year.

Another option, especially if the line of credit is not seasoned, is to calculate term debt payments as if the line had to be termed out over 3 or 5 years. That is much more conservative.

I agree, Ken, that the choice of cash or accrual basis will make a difference. Not only in this calculation, but often in trying to compare the financial statements to the tax returns for the same period.

Here is the link to a blog post on the comparison:
http://www.lindakeithcpa.com/ask-linda/ask-linda-2.htm

Linda Keith CPA
www.LindaKeithCPA.com
www.LendersOnlineLibrary.com

Comment on Income Statement

2008-12-12T01:08:14Z

A sample income statement is here, and a sample common size income statement is here.

Comment on Income Statement

2008-12-12T00:12:30Z

Need some examples of actual income statements to look at!

Comment on Traditional Debt Service Coverage used by Banks

2008-12-10T04:40:01Z

The denominator of this ratio (representing debt service) can and should include payments on short-term debt such as revolving lines of credit. The problem is that payment requirements on short-term debt are, indeed, arbitrary. One way banks handle this situation is to include interest-only payments in the debt service as if the line were fully drawn. A more conservative method might include some principal payments as well, and a very conservative measure would include full principal repayment plus interest. Ultimately, how you include payments on short-term debt is a judgment call.

Sometimes it takes some research to find accurate figures for the current portion of long-term debt and company debt service requirements. You may have to check footnotes or schedules, ask your borrower or potential borrower, or even ask their other lenders and their accountants for information. In any event, to construct a proper balance sheet or to create an accurate debt service coverage ratio, you may have to ask questions, figure it out yourself, or, if all else fails, estimate.

Comment on Traditional Debt Service Coverage used by Banks

2008-12-09T20:47:03Z

Is it true that DSC should be used only for holding companies and companies that utilize only long term debt? DSC does not account for short term debt such as revolving lines of credit. My former boss encouraged me to use DSC on analysis for all businesses but my current boss claims it is not appropriate to use DSC on most operating companies due to the short term debt inaccuracy. It is also very difficult to determine CPLTD from tax returns and some company prepared statements. What is the typical underwriting practice?

Comment on Preferred Stock

2008-10-28T15:22:24Z

The U.S. Treasury is receiving preferred stock from banks in exchange for investments it makes. Here’s an article about SunTrust selling preferred stock to the government.

Comment on Profit Margins

2008-10-21T02:51:35Z

In this Street Smarts article on Inc.com, Norm Brodsky argues that the gross profit margin is the most important number on the income statement.