P2.28 Analyzing Financial Statement Information. The Fayette Corporation has applied to the Irving National Bank for...
P2.28 Analyzing Financial Statement Information. The Fayette Corporation has applied to the Irving National Bank
for a $100,000 loan to purchase new equipment for its manufacturing operations. As part of the loan application,
the chief financial officer of Fayette submitted the following financial statement information:
2018 2019
Balance sheet
Current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000 $ 50,000
Noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . 152,000
175,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,000 225,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 25,000
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . 75,000 91,000
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . 100,000 109,000
Income statement
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . $120,000 $123,500
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . (101,000)
(88,500)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,000 $ 35,000
Statement of cash flow
Cash flow from operating activities . . . . . . . . . . . . $ 32,000 $ 49,500
Cash flow from investing activities . . . . . . . . . . . . (40,000) (48,000)
Cash flow from financing activities . . . . . . . . . . . . 17,500
22,000
Change in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,500 $ 23,500
Required
Analyze the financial statement information of The Fayette Corporation and indicate whether you believe that
the firm’s loan application should be approved. And, if so,why?
Homework Answers
Yes, the company should be provided with the required loan.There may be discussion on the amount of loan where the amount required by fayette corporation for laon is $ 100,000.
The bank may negotiate on the amount as per their internal financing policies.
Why loan should be granted to Fayette corporation;-
- The company's current asset is in upward trend which means company is likely to maintain it's liquid ratios as the current liabilities has been increased but the increase in CL is likely to cope up by increase in current assest.
- The company is actively investing in the fixed asset which are the main sources of cash genaration.The companies which try to invest in capital asset will always remain favourate for the growth in long term than a company which invest less in capital asset.The potential future of company seems good.
- The bank should not be worried by the long term liabilities which is likely to increase afer current processing of loan.As the debt to total asset ratio after this will remain in favorable position.
- The company's abiltiy to earn cash and make profit is very good. The company has remained successful in reducing it's cost which has increased it's net income.
- The company's cash generations from the operation is proof that company's investment in long term asset is providing returns.
- The company's investing activities shows a cash outflow which is good for a rowing company.
In an overall analysis we can say that loan request should be process with.However bank must be careful for the accuracy of financial statements.
Please comment for any explanaion,
Thanks,
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P2.28 Analyzing Financial Statement Information. The Fayette
Corporation has applied to the Irving National Bank
for...
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