Many businesses find it necessary at some point to borrow funds. Lenders need to assess the credit worthiness of borrowers. Two determinants of credit worthiness are the existence and extent of collateral and the liquidity of the business. The balance sheet can be useful in assessing both factors. Collateral are those assets that are pledged by a lender to secure a loan. Even though assets, particularly fixed assets, are not reported at current fair market values on the balance sheet, the lender can determine the kind of assets the business owns and the extent of debt to other lenders. It is usually not difficult for lenders to reach reasonable estimates of the current liquidating values of most business assets, so their absence on the balance sheet usually is not a major problem.
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Peter John Baskerville
onto Basic Accounting Concepts November 29, 2011 3:14 PM
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