ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements
A bank is considering whether to grant a five-year loan to a company. Which of the following is the bank's most significant information need when analysing the company's financial statements?
The bank's key need is assessing whether the company can generate enough cash to pay interest and repay the loan when due. Lenders focus on liquidity, cash flow and gearing, not on directors' pay, community contribution or share price.
- AThe company's ability to generate cash to pay interest and repay the loanCorrect
- BThe fairness of the pay awarded to the company's directors
- CThe company's contribution to the local community
- DThe likely future share price of the company
Explanation
Lenders are primarily concerned with whether interest will be paid and capital repaid on time, so they focus on liquidity, cash generation and gearing. Directors' pay and community impact are of secondary interest to a lender, and share price is a shareholder concern.
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