CBP Financial Analysis & Credit Management 1 — Questions and Answers
Question 1: What is the purpose of financial ratio analysis in credit assessment?
- To forecast market trends
- To assess creditworthiness (Correct answer)
- To manage interest rates
- To evaluate staff performance
Correct answer: To assess creditworthiness
Financial ratio analysis helps evaluate a borrower's ability to repay by analyzing liquidity, solvency, and profitability.
Question 2: Which of the following is a key component of a credit report?
- Investment portfolio
- Loan amount only
- Credit history and repayment record (Correct answer)
- Real estate holdings
Correct answer: Credit history and repayment record
A credit report includes the borrower’s credit history, outstanding debts, and payment behavior to assess risk.
Question 3: What does the debt-to-equity ratio measure?
- Cash reserves
- Net income growth
- Financial leverage (Correct answer)
- Inventory turnover
Correct answer: Financial leverage
The debt-to-equity ratio compares a company's total liabilities to its shareholders' equity, indicating financial leverage.
Question 4: What is the role of collateral in credit management?
- To increase interest income
- To eliminate credit checks
- To secure the loan against default (Correct answer)
- To reduce paperwork
Correct answer: To secure the loan against default
Collateral serves as security for a loan, reducing the lender’s risk in case of borrower default.
Question 5: Which financial statement shows a company’s financial position at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Profit and loss summary
Correct answer: Balance sheet
The balance sheet reflects a company’s assets, liabilities, and equity at a specific date.
Question 6: Why is credit scoring important in financial institutions?
- To calculate tax returns
- To track inflation
- To assess borrower risk efficiently (Correct answer)
- To monitor staff productivity
Correct answer: To assess borrower risk efficiently
Credit scoring provides a standardized method to evaluate borrower risk and supports consistent lending decisions.
CBP Financial Analysis & Credit Management 1
What is the purpose of financial ratio analysis in credit assessment?