Financial statements analysis for credit managers notes



This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to analyse financial statements and reports for credit applications’ assessment, evaluation and appraisal and for credit monitoring.


A candidate who passes this paper should be able to:

  • Demonstrate an understanding of the importance of financial analysis in the credit decision making process
  • Use various tools and techniques of financial analysis, noting their strengths and limitations
  • Analyse the financial ratios in the context of business and industry analysis given industry and market benchmarks
  • Prepare a cash operating cycle and link working capital management to credit management.
  • Identify financial distress using financial statements analysis
  • Analyse the application of non-financial reports in making credit decisions
  1. Overview of Financial Statement Analysis

1.1       Explanation of the term “financial statements analysis”

1.2       Difference between financial reporting and financial statement analysis

1.3       The roles of financial reporting and financial statements analysis

1.4       Linkage between Credit Analyst function and financial statement Analysis

1.5       Importance and challenges of financial statements analysis: Change, globalism and technology

1.6       The objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls

1.7       Sources of information for Credit Analysts:

1.7.1    Sources of Financial Information:       (financial statements – statement of financial position, comprehensive incomes statement, statement of cash flows, statement of changes in equity, notes to financial statements)

1.7.2    Sources of Non-Financial Information:       (Memorandum of Association, Articles of Association, CR12 Forms, Statement of beneficial owners, Board Resolutions, auditors report, management commentary & discussions, Industry Benchmarks/norms, supplementary information, sustainability reports, integrated reports, industry experts’ comments, rating agencies, filing with regulatory authorities and press reports and strategic plan etc)

1.8       Approaches to analysing financial statements (macroeconomic environment, industry and company – either top down or bottom up)

1.9       Steps in analysing financial statements (Define the purpose and context of analysis, collect data, process data, analyse data, communicate recommendations and periodic reviews)



  1. Quality Analysis- Statement of Profit or Loss

2.1       Components of Income Statement: (Incomes, Expenses, Appropriations)

2.2       Presentation Formats of Income Statements

2.3       Understanding and application of the Operating and Non-operating components of the Income Statement in making lending decisions

2.4       Analysis of Non-recurring items and changes in accounting policies from Income statement for lending purposes

2.5       Income Statement Analysis: Common Size Analysis (Vertical vs Horizontal Analysis) and Income Statement Ratios

2.6       Interpretation of Income statement analysis results for lending and debt collection purposes

2.7       Restating and readjustment of Income statement items for lending purposes

2.8       Common Red flags and warning signs that Credit analyst should be concerned with when conducting income statement Analysis for lending purposes

2.9       Application of Industry benchmarks in Interpretation of Income statement analysis results


  1. Quality Analysis- Statement of Financial Position

3.1       Elements of statement of financial position: (Assets, Liabilities and Equities)

3.2       Uses and limitations of balance sheet in financial analysis

3.3       Presentation Formats of statement of financial position

3.4       Analysing short-term assets/investments and the short-term debt-paying ability of an entity

3.5       Analysing Long-term debt-paying ability of an entity: (Two Approaches; – Ability to carry debts as indicated Income statement and Ability to carry debts as indicated balance sheet)

3.6       Balance Sheet Ratio Analysis and Interpretation of Results for Lending and debt collection purposes

3.7       Restating and readjustment of balance sheet items for lending purposes

3.8       Common Red flags warning that Credit analyst should be concerned with when conducting Balance sheet quality Analysis for lending purposes

3.9       Application of Industry benchmarks in Interpretation of balance sheet analysis results


  1. Quality Analysis – Statement of Cash flows

4.1       Elements of Cash flow statement:(Operating, Financing & Investing Activities)

4.2       Meaning of Cash flow statement elements to a credit analyst

4.3       Uses and limitations of cash flow statement analysis

4.4       Linkage between Cash flow statement to Income statement and balance sheet

4.5       Presentation formats of cash flow statement and Effects on lenders decision

4.6       Cash flow statement Ratio Analysis and Interpretation of Results for Lending and debt collection purposes

4.7       Common Red flags warning that Credit analyst should be concerned with when conducting Cash flow statement quality Analysis for lending purposes

4.8       Application of Industry benchmarks in Interpretation of cash flow analysis results

4.9       Difference between Cash flows and Profits in establishing ability to pay debts

4.10     Business cash flow drivers





  1. Financial Statement Analysis Tools and Techniques

5.1       Tools and Techniques used in financial statement Analysis

5.2       Uses and Limitations Tools and Techniques used in financial statement Analysis

5.3       Trend analysis and Ratio analysis

5.4       Application of Trend Analysis and Ratio Analysis in Making lending decision

5.5       Credit analysis Ratios: Categorization and Importance of Credit analysis ratios in making lending decision

5.6       Analysing Financial Efficiency Cash flow drivers: Application of Profitability ratios and turnover ratios to analyse company cash flow drivers

5.7       Application of Excel Spread Sheets Models in Ratio analysis and Trend analysis: In developing projections (determining the reasonableness of assumptions behind business fundamentals and swing factors in lending decision)


  1. Financial Statement Analysis and Credit Risk Assessment

6.1       Basics of credit analysis

6.2       Quantitative versus qualitative credit analysis

6.3       Analysis of company prospects and risks using qualitative information (strategy and business environment analysis) and quantitative information (financial position and financial performance)

6.4       Determine the profitability, efficiency, and leverage drivers for any business

6.5       Analysing various types of risk (Market risk, Inventory risk, Cash flow risk, solvency risk etc.) using financial statement analyses

6.6       Short term credit analysis (liquidity) importance of liquidity, cash flows, composition of current assets and current liabilities, short-term debt-paying ability of an entity, and current financial conditions

6.7       Long term credit analysis (solvency); importance of solvency, projection of cash flows, evaluation of extended profitability (sustainable earnings power)

6.8       Credit rating and credit scoring process

6.9       Business Environment analysis (Operating environment, Industry analysis, Company’s competitive position, Evaluation of management)

6.10     Projections of period – – period cash flows

6.11   Using financial statement analysis to access tolerance for leverage, operational stability and margin stability

6.12    Analysis of bank financial statements using CAMELS framework

6.13    Liquidity risk management for banks


  1. Financial distress

7.1       Analysing long term solvency

7.2       Using operating cash flows data

7.3       Causes of financial distress

7.4       Bankruptcy prediction models: examining the trend and behavior of selected financial ratios

7.5       Altman’s  z- score: Multiple discriminant analysis

7.6       Five financial ratios are included in the Z-score measuring liquidity, age of the firm and cumulative profitability, financial structure capital and turnover rate

7.7       Critical analysis of companies fundamentals


  1. Working Capital Management

8.1       Importance of Working Capital management in a business

8.2       Impact of credit policy on working capital management

8.3       Working capital: Current assets (cash and cash equivalents, accounts receivables, inventories, prepayments, marketable securities and assets held for sale) and current liabilities (Accounts payable, accrued expenses, Income taxes payable, current portion of long term debt

8.4       Accounts receivable management: Methods, Techniques and Receivables ratios

8.5       Inventory management: Methods, Techniques and Inventory ratios

8.6       Accounts payable management: Methods, Techniques and Payables ratios

8.7       Cash operating cycle/Cash conversion cycle and liquidity

8.8       Cash flow Management Strategies


  1. Financial Reporting Quality

6.1       Financial reporting and quality of reported results (including quality of earnings, cash flow, and balance sheet items)

6.2       Spectrum for assessing financial reporting quality in financial statements present customers

6.3       Conservative and aggressive accounting

6.4       Motivations of poor quality financial reports

6.5       Discipline mechanisms regarding poor quality financial reports

6.6       Accounting methods (choices and estimates) for managing earnings, cash flow, and balance sheet items

6.7       Accounting warning signs and methods for detecting manipulation of information in financial reports


  1. Reporting

10.1     Qualitative and quantitative skills of credit analyst

10.2     Users and needs of credit analyst report

10.3     Components and Structure of Credit Analyst Report: Based on Analysis of Financial and Non-financial information for individual customers or an entity

10.4     Presentation of Credit analyst report to: Department, CFO, CEO, Credit committee and Board of directors, Equity and debt investors

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