DECA Financial Consulting Complete Practice Exam

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What is a primary reason a bank examines a business's balance sheet?

To evaluate market trends.

To assess company brand value.

To determine whether the company qualifies for additional credit.

The primary reason a bank examines a business's balance sheet is to determine whether the company qualifies for additional credit. A balance sheet provides a snapshot of a company’s financial position at a specific point in time, including its assets, liabilities, and owner's equity. By analyzing this information, banks can assess the business's financial health, liquidity, and overall risk profile, which are critical factors in making lending decisions.

For instance, if a company has a strong asset base relative to its liabilities, it may indicate to the bank that the company is capable of managing additional debt. Conversely, a weak balance sheet may suggest that extending credit would pose a heightened risk. Therefore, the balance sheet is a vital tool for banks to evaluate the creditworthiness of potential borrowers before approving loans or increasing credit limits.

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To analyze operational costs.

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