Reviewing financial statements over a longer period helps underwriters to better assess:

• A. Tax liability.
• B. Market price of stock.
• C. Credit risk.
• D. Employee performance.

Answer: (C)

When evaluating credit risk, lenders want to know if a borrower can reliably repay debt under different conditions. Looking at financial statements over several years reveals trends in earnings, cash flow, and leverage that a single year can’t show. It helps assess whether operating cash flow consistently covers debt service, how debt levels are evolving, and how liquidity and working capital vary across economic cycles. This broader view smooths out one-time spikes or seasonal effects and highlights vulnerabilities or strengths in the company’s finances, giving a clearer picture of repayment capacity.

Tax liability, market price of stock, and employee performance don’t directly measure the borrower’s ability to meet debt obligations over time, so they’re less informative for assessing credit risk in this context.