The preference by Maltese banks for the cash flow statement or the profit statement in the assessment of clients' financial position

Abstract

This dissertation is concerned with the local banks' use of the profit statement and the cash flow statement, when assessing clients' financial position for the purposes of making loans. At the end, the study reveals whether one of the statements, if any, is preferred by such banks. The introductory chapter contains a brief summary of the legal requirements with respect to financial statements, as well as the objectives of these statements. A brief description of financial statement users is also given, with particular emphasis given to the loan creditor group, the subject of this study. The dissertation then proceeds with a theoretical background, dealing mainly with descriptions and explanations of the profit and loss account and the cash flow statement. A number of ratios that can be extracted from each of the statements are also considered. After the theoretical aspect, the practical side is considered through the carrying out of research on the local scenario. The four local banks, namely HSBC Bank Malta p.l.c., Bank of Valletta p.l.c., Lombard Bank Malta p.1.c. and APS Bank Ltd. were selected for research purposes, and the credit institutions dealing only with non-resident people were excluded. The bulk of the research consists in a description of how the local banks use the two financial statements. The techniques generated to study the figures appearing in both statements, including ratio analysis, are also dealt with. The concluding chapter focuses on the conclusions reached. It was found that the cash flow statement and the profit statement are considered complementary to each other by two of the four banks. The remaining two banks have a preference for the profit statement, but in the case of one bank, there is the intention to implement a better system in the future, incorporating also the use of cash flow.