Question

In week 5, Scott was not sure why the bank needs financial statements instead of cash flow projection as part of the loan application, can you explain why?

A) A: Historical performance, B: Future projections; C: Cash flow stability, D: Ignoring the bank
B) A: Ignoring the bank, B: Cash flow stability; C: Historical performance, D: Future projections
C) A: Future projections, B: Historical performance; C: Ignoring the bank, D: Cash flow stability
D) A: Cash flow stability, B: Ignoring the bank; C: Future projections, D: Historical performance

Answer 1

Banks require financial statements instead of cash flow projections for a loan application because they provide historical performance and cash flow stability, which are more reliable indicators of a borrower's ability to repay the loan than future projections.

Step-by-step explanation:

When applying for a loan, banks require financial statements instead of cash flow projections for several reasons:

1. Historical performance: Financial statements provide a record of a company's past performance, including its profitability, cash flows, and financial health. This information helps the bank assess the borrower's ability to repay the loan based on their track record.
2. Cash flow stability: Financial statements show the cash inflows and outflows of a business over a specific period. By analyzing this data, banks can evaluate the stability of a company's cash flow and its ability to generate sufficient funds to meet its obligations.
3. Ignoring the bank: This option is not relevant to the question.
4. Future projections: While cash flow projections can provide insight into a company's future cash flows, they are inherently uncertain and rely on assumptions. Financial statements, on the other hand, provide actual results and are more reliable for assessing a borrower's financial position.