While the bank thus gathers credit information from a wide variety of sources, these serve merely as checks to the borrower's financial statement or property blank which really constitutes the basis of an unsecured loan. Banks sometimes employ a general statement for all borrowers, but usually the form will vary according to the type of organization and the nature of the business. Thus large banks use separate forms for individuals, firms, and corporations, and different blanks for farmers, merchants, and manufacturers. The financial statement presents the amount of the borrower's assets and liabilities usually arranged in order of their liquidity. Analysis of these items will be made with particular reference to quick assets and current liabilities, for these are of especial interest in determining the credit rating of a prospective borrower. a. Assets.

(1) Cash on hand and in bank. Cash on hand covers all ready money found in the safe of the borrower. As checks are claims payable on demand, they also may be considered as cash. Promissory notes of debtors or the personal checks of business associates must not be regarded as cash items.

Cash in banks is composed of all deposits payable on demand and so will not embrace time deposits or collection items such as notes and drafts for which deposit credit has not as yet been allowed.

(2) Notes receivable. These obligations have been received from customers in payment of merchandise actually sold, and may assume the form of promissory notes or accepted drafts. This item should not include notes from salesmen, employees, partners, stockholders, or officers of the corporation. The maturity of these obligations must be current, and not past due, renewed or in the hands of attorneys for collection.

(3) Accounts receivable. A firm does not always receive written obligations from customers to whom goods have been sold, but instead these unpaid charges are entered as accounts receivable on the books of the seller. From the item of accounts receivable, the following should be excluded: (a) loans to partners or officers, (b) advances to subsidiary concerns, (c) advances to salesmen, (d) balances covering goods shipped to a selling agent or on consignment where no actual sale has been effected, (e) items long overdue or uncollectable, (f) accounts assigned and pledged for the purpose of securing loans.

(4) Merchandise and inventory. This item is composed of raw materials, goods in process of manufacture, or completely finished, which are still unsold, but actually owned by the borrower. The statement usually draws a distinction among these three classes, for they vary considerably in their relative marketability. Raw material is more or less free capital which can be applied to various uses, and so has a wider market than merchandise in a finished state. There is only a limited demand for goods on which manufacturing operations have been performed but have not as yet been completed.

Merchandise must always be evaluated on a conservative basis. Naturally the credit man cannot accept the selling price at which the owner hopes to dispose of his goods. Instead, merchandise is appraised at its lowest value, which may either be the market price or the cost of production. The former is used in a period of falling prices, while the latter is employed during an upward trend.

(5) Investments. Cash, notes and accounts receivable, and inventory are regarded as quick assets. To this group the item of investments is sometimes added, depending upon the nature of these holdings. United States government obligations, listed bonds, and at times conservative stocks, are readily convertible into cash, but securities of a speculative nature or of affiliated companies are rated as slow assets.

(6) Plant. This class also includes real estate, buildings, machinery, and general equipment. Little consideration is given by the bank to intangible assets such as trademarks patents, franchises, leases, and goodwill.

b. Liabilities.

(1) Notes payable. These are debts which have arisen from the purchasing of merchandise or supplies. Notes payable may also repre-sent sums which have been borrowed from banks, from the open market through the aid of note brokers, or from private individuals such as stockholders, partners, friends, and relatives.

(2) Accounts payable. Merchandise and supplies are not always purchased for cash or in notes, but may also be bought on open account. This item corresponds to the entry "accounts receivable" on the asset side of the statement.

(3) Deposits. These funds may have been left by stockholders, partners, and employees, and are subject to immediate withdrawal.

Deposits, accounts, and notes payable constitute current liabilities, which must be analyzed in relation to quick assets.

(4) Proprietorship. This includes capital stock, surplus, and undivided profits. (5) In general all obligations which mature after the interval of one year may be safely counted as deferred liabilities. Consideration must also be given to annual sales and various reserve items.