Enticing Fashions Ltd. designs and manufactures upscale women’s clothing. The company’s early customers were small boutiques in Toronto, Montreal, and Vancouver. Customers liked the colours and fabrics used and enjoyed the unique styling of the garments. Demand for the company’s clothing rose to the point where they are looking at opening a number of their own stores in various retail locations across Canada. The company has approached its bank seeking additional financing so that the company can proceed with its plan to develop retail locations and hire more people to assist with various aspects of the business. The bank wants to see the company’s financial statements.
You are an accountant employed by a local accounting firm and Enticing Fashions Ltd. has been your client for several years. In previous years, you have prepared the company’s financial statements and corporate tax returns. Enticing Fashion’s CEO has approached you because he wants to have an understanding about how the bank may use the company’s financial statements in determining whether or not to grant the loan.
Required:
Prepare a memo to Enticing Fashion’s CEO addressing his question regarding how banks use financial statements to determine whether or not to grant loans to companies.