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.
ABC, Co.
Income
Statement
For the Year Ended December 31, 2018
Sales revenue $100,000
Cost of goods sold (50,000)
Depreciation expense (5,000)
Remaining expenses (25,000)
Net income $20,000
ABC, Co.
Balance Sheet
December 31, 2018
Cash $5,000
Accounts receivable 25,000
Inventory 20,000
Depreciable asset $55,000
Accumulated depreciation (5,000)
Total $100,000
Accounts payable $10,000
Interest payable 5,000
Note payable 45,000
Common stock 20,000
Retained earnings 20,000
Total $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 20.00% 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.
Required:
1. Write a Memo to the President of ABC, Co. of 200 - 300 words.
2. Prepare the statement of cash flows using the indirect method. All beginning balance sheet accounts are .00
3. Would you approve the loan or deny the loan?
4. What aspects of the financial statements would deny or merit the new loan?
5. Give both financial statement analysis and any lending comments in your memo.
