Posted by Shayne Albine for OldRepublicSurety
We often get questions about financial statements and why they are important to the bond underwriting process. Underwriters will generally ask for several key financial documents, including a balance sheet and an income statement. These financials help us determine the liquidity of a business and its ability to generate income.
A balance sheet indicates a company’s financial condition on a specific date. It’s a look at the company’s assets, liabilities and equity at that particular moment.
The income statement tells us how the company is doing over time, generally a one-year period with an end date of December 31. Sometimes called a profit and loss statement, the income statement shows income, expenses and net income (income minus expenses).
Both are essential underwriting tools. The balance sheet describes how liquid the company is. Liquidity is defined as how easily assets can be converted into cash. Assets like stocks and bonds are very liquid since they can be converted to cash easily. However, assets such as property, plant, and equipment are not as easily converted to cash. The income statement shows us how profitable the company is. Does it have a positive income after paying its expenses?