Question

Assume that you recently accepted a position with federal savings Bank as an assistant loan officer. As one of your first duties, you have a been assigned theresponsibility of evaluating a loan request for $90,000 from Goldworks.com, a small proprietorship. In support of the loan application, adriana, owner, submitted atrial balance for the first year of operations ended March 31, 2010.

1. Explain to Yolanda Tovar why a set of financial statements (income statement, statement of owner’s equity, and balance sheet) would be useful to you in evaluatingthe loan request.

2. In discussing the Trial Balance with Yolanda Tovar, you discovered that the accounts had not been adjusted at March 31. Analyze the Trial Balance and indicatepossible adjusting entries that might be necessary before an accurate set of financial statements could be prepared.

3. Assuming that an accurate set of financial statements will be submitted by Yolanda Tovar in a few days, what other considerations or information would be requiredbefore making a decision on a loan request?

4. You noted that Goldworks.com’s trial balance is prepared through March 31, 2010. Why would the business close out its year on this date? What factors couldinfluence this selection?

Answer 1

1.
Four basic financial statements are income statement, balance sheet, statement of owner’s equity and statement of cash flows. They all give a view of thefinancial position of the company. Income statement shows the difference between revenues and expenses. Any profit or loss of a particular period is shownby the income statement. The profit is then added to the statement of owner’s equity as it is the right of the owner, then finally the ending balance ofcapital is shown in the balance sheet. The revenues and expenses have been shown in income statement but have not been converted into cash; they are shownas receivable and payable in balance sheet. And all the revenues and expenses converted into cash are shown in the statement of cash flows. All thetransactions other than revenues and expenses are shown in the balance sheet and cash flow. When assets are purchased they are shown in the balance sheetas increase in assets and decrease in cash for payment to purchase the assets. When the assets are utilized they are transferred to the income statement asan expense.



2.
The two adjustment entries seems to be passes, one for usage of supplies and other to record depreciation of Trucks and equipment, and they are asfollows:

Supplies expenses Dr. Supplies Cr.
Depreciation Expense DR. Accumulated depreciation Cr.

Other adjusting entries may be of prepaid insurance, if any or other expense payable may be passed but as the data is not given, therefore it may beassumed that all expenses have been recorded for the period.

3.
a. The age of business, how old the business is running.
b. Any loan already taken and what is the status of that loan.
c. How much is financed by equity so the loan to value ratio may be developed.

Answer 2

Explain to Yolanda Tovar why a set of financial statements (income statement, statement of owner’s equity, and balance sheet) would be useful to you in evaluating the loan request.