UBC Theses and Dissertations

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UBC Theses and Dissertations

An appraisal of accounting statements for credit purposes Goh, Joon Hai


The credit grantor needs to make credit appraisals in deciding whether or not to extend credit to a corporation enterprise. The accounting statements (cash flow statement, funds flow statement, income statement and balance sheet) are the usual sources of such information. However, these statements contain different types of information and are capable of various interpretations. This study seeks to establish what types of information are or ought to be contained in these statements which would be of use to credit grantors, to evaluate the relevance and usefulness of such information for making credit decisions, and to suggest such modifications of present statements as appear desirable. The short-term creditor is primarily concerned with short-term solvency. The cash flow statement and the funds flow statement are two sources of information which are relevant. The long-term creditor's principal concern is long-term solvency. Future income flow is particularly indicative of long-term solvency. Present income is an index of the probable future income. The balance sheet is a statement listing the resources available which give rise to future income. Thus, the long-term creditor's primary interest is in the income statement and the balance sheet. His interest in short-term solvency and in the income statement is secondary and only to the extent that long-term solvency becomes irrelevant if an enterprise becomes insolvent in the interim period before payment, of his debt. Each of the terms "cash flow", "funds flow", "income" and "balance sheet" have several interpretations. The relevant accounting statements can each be prepared in various ways according to the interpretation of the respective terms. The information in the statement will vary accordingly. A proposal is made in this study to adopt "cash flow as historical changes in the cash account", "funds flow as the inflow and outflow of total resources or purchasing power", "income as measured according to the current operating concept of income", and "balance sheet as a listing of total resources available". An attempt is made to introduce into the respective statements such modifications as appear particularly relevant to the creditor for decision making. A model for each type of statement, based on the proposed interpretation and incorporating the suggested modifications, is illustrated in the study.

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