Analysis by Trial Balance-Part I

Even the most thorough analysis of a credit The privilege of buying goods, services or borrowing mone A medium of exchange; coined or stamped currency. y in return for a promise of future payment. applicant The party (generally buyer/importer) for whose account a letter of credit is established. letter of credi A financing instrument A right to the payment of money such as agency notes, commercial pape The unsecured promissory notes of large, financially sound corporations. r, T-Bills, certificates of deposit (CD's), banker's acceptances and repurchase agreements. issued by a bank in favor of an exporter The person or company that sells or arranges to transport goods out of a country. that substitutes the bank's creditworthiness for that of the importer. t is established. 's balance sheet A financial statement listing the assets, liabilities and owner’s equity of a business entity as of a specific date. and income statement is apt to leave some questions about the company's financial condition. Often, a credit analyst can answer them by analyzing certain supplementary financial documents. One of the most useful of these is the applicant's most recent trial balance.

It has been stressed that it is important to base credit analysis on customers' most recent financial statements The balance sheet, income statement, statement of changes in financial position, statement of changes in owners' equity accounts, cash flow statement and notes. . In business, things can change with quickly. A good credit risk Conditions in which the decision maker has to estimate the likelihood of certain outcomes. can become a poor one, or a poor risk can improve almost overnight. What has not been emphasized is that fact that a customer's "most recent" financial statement may not be especially current - and that the older the statements are the less reliable they are as a risk management and credit management tool.

The fact is that since statements are generally issued from two to four months after the close of the fiscal year The twelve-month period that a company adopts for financial accounting purposes. , statements creditors receive may be contain information anywhere from two to fifteen months old. For this reason, it is often a good idea to supplement the analysis of a business' financial statements with an analysis of its latest trial balance.

A trial balance is a schedule (usually drawn at the end of each month) of a business' assets and liabilities as of a given date, and of its income and expenses from the preceding balance sheet date to the trial balance date. The net worth figure or figures are not current but are carried over from the preceding balance sheet. The same applies to the inventory Goods held for sale or leas A contract granting the use and possession of real property for a specified time and for fixed payments. e that are furnished under contracts of service, usually raw material Industrial products that are composed of farm and natural products. s, work in proces The direct material costs, the direct labor costs and the factory overhead costs, that have entered into the manufacturing process but are associated with products that have not been finished. s, or materials used or consumed in a business. figure, unless the company is able to take an inventory at any time and not just when it closes its books.

As you can see in the sample trial balance of the Wilcox Company shown below, all of these items are listed as either debits or credits. In the debit column are all assets and expenses; in the credit column are liabilities and income. From this schedule, an analyst can construct an interim balance sheet that will bring the company's financial statements current. Here is how to do it:

First set up in regular balance sheet form, all of the asset and liability items, except for those which were brought forward from December 31 of the preceding year (including the inventory and net worth figures):

Next, take the December 31 inventory figure and add it to the figures given in the trial balance for purchases, supplies, and wages:

From this total you subtract gross sales, less returns, allowances, and the estimated gross profit The excess of net over the cost of merchandise sold. on sales. (You have to get the gross profit percentage either from the customer's previous income statement or from your own knowledge of the line of business.):

Then you subtract the estimated cost of sales figure from the total inventory, purchases, and wages to get an estimate of the inventory as of February 28 of the next year:

By inserting this estimated inventory in your tentative balance sheet you are able to determine the company's total assets figure ($79,000) as of the trial balance date. And, since the same figure must obviously appear for total liabilities, by subtracting from it the liabilities you have already listed, you can determine the net worth ($79,000 - $34,000 = $45,000 net worth):