Unit 1 Discussion Discussion Topic Do Numbers Lie? The Other Side of Financial S
ID: 1170356 • Letter: U
Question
Unit 1 Discussion
Discussion Topic
Do Numbers Lie? The Other Side of Financial Statement Analysis
If you were to enter the banking industry you may find yourself approving or not approving loans. The following is a good example of a common event you may encounter.
Company X is looking for a $100,000 to purchase new equipment. The finance manager for Company X recently presented financial reports. Upon further analysis of the statements you, the banker, noted some window dressing of the financial statement. In this case it seems Company X will delay payments to vendors in order to make their cash position look higher.
Do you see this practice a matter of ethical and or legal concern?
Do you think most all company’s “window dress” their data?
Please explain your decision to approve or disapprove Company x’s loan.
Explanation / Answer
This is an ethical issue because the balance sheet is prepared for quarterly semi-annually or yearly so companies use try to manipulate account payable and receivable within the timeframe which is legal but not ethical. Delayed recognition of payments to vendors can artificially inflate the account payable days.
Many companies use the above leeway to window dress their data to show their business is attractive to lenders as well as equity holders to gain access to cheap capital.
If the manipulation of financial statement is high then we should disapprove the loan as chance of default or delayed payment is high. However we can offer loan at higher interest rate to company X by adding the higher default risk premium which will deter the company from accepting our offer.
Best of Luck. God Bless
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