Question

please answer questions 2-6

You are a loan officer for National Bank. You have a loan application submitted by a company for $50,000. This company just got a prior loan for $45,000 and has not made the first payment. This gives you an uneasy feeling as you examine a loan application from ABc, Co. The application included the following financial statements. АВС, Со. Income Statement For the Year Ended December 31, 2016 $100,000 (50,000) (5,000) (25,000) $20,000 Sales revenue Cost of goods sold Depreciation expense Remaining expenses Net income АВС, Со. Balance Sheet December 31, 2016 $5,000 25,000 20,000 $55,000 (5,000) Total $100,000 Cash Accounts receivable Inventory Equipment Accumulated depreciation Accounts payable Interest payable Note payable $10,000 5,000 45,000 20 n00 Cammon etacle December 31, 2016 $5,000 25,000 20,000 $55,000 (5,000) Total $100,000 Cash Accounts receivable Inventory Equipment Accumulated depreciation Accounts payable Interest payable Note payable Common stock Retained earnings Total $10,000 5,000 45,000 20,000 20,000 $100,000 It is not ABC's profitability that worries you. The income statement submitted with the application shows net income of $20,000 in the first year of operations. By referring to the balance sheet, you see that this net income represents a 20% rate of return on assets of $100,000. Your concern stems from the recollection that the note payable reported on ABC, Co's. balance sheet is a two-year loan you approved earlier in the year. You also recall another promising new company that, just last year, defaulted on another of your bank's loans when it failed due to its inability to generate sufficient cash flows to meet its obligations. Before requesting additional information from ABC, Co. you decide to prepare a statement of cash flows from the information available in the loan application. information from ABC, Co. you decide to prepare a statement of cash flows from the information available in the loan application. Required: 1. Write a Memo to the President of ABC, Co. of 250-300 words. 2. Prepare the statement of cash flows using the indirect method. All beginning balance sheet accounts are .00 3. Explain the bank's position on the loan. 4. Would you approve the loan or deny the loan? 5. What aspects of the financial statements would deny or merit the new loan? 6. Give both financial statement analysis and any lending comments in your memo.

Answer 1

ABC Company 2 Cash flow Statement 3 (Indirect method) For the period ending December 31, 2016 4 5 Details $ Amount $ Particulars 6 Cash flows from operating Activities 7 Net Income 20,000 8 Add Adjustments to reconcile net income to 9 net cash provided by operating activities: 10 11 Depreciation 5,000 Increase in Accounts receivable (25,000) 12 (20,000) 13 Increase in Inventory Increase in Accounts Payable Increase in Interest payable 14 10,000 5,000 (25,000) 15 (5,000) Net Cash provided by Operating Activities 16 17 Cash Flows from Investing Activities Purchase of equipment 18 (55,000) 19 Net cash flows used in Investing Activities (55,000) 20 21 Cash Flows from Financing Activities Increase in Notes payable 22 45,000 23 Issue of Common Stock 20,000 24 Net cash Provided by Financing Activities 25 65,000

Net Increase in Cash & its equivalents 26 5,000 Add Opening Balance of Cash 27 Closing Balance of Cash 28 5,000 29 30 3 Bank position on the loan is very awakward. Bank is neither in a position of approving 31 the loan nor denying the loan . Although the business has earned a profit of $20,000 but his cash positin is not good. It has only $5,000 cash in hand and has not yet made the installment of first loan of $45,000. 32 33 34 35 4 I would deny the loan as the company's financialposition is not very strong and it has only $5,000 36 cash in hand and its accounts payable and interest payable is increasing and its inventory and accounts 37 receivable is also increasing indicating that the customers are not paying their debt in time .All these 38 factors indicate that the company's financial position is not strong. 39 40