Description
Instructions: Read the scenario and then access the data worksheet below. Review the grading rubric, which provides tips on organizing your team process.
Scenario: The team assignment requires an analysis of specific financial data of Bob Smith, Inc. Bob is an existing bank customer. When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original loan. This cash balance was required for the bank to make its target yield on the loan created. The Cash Flow Statement and Balance Sheet show an actual YE 2017 cash balance of less than $34,000.
The team assignment requires participation in a team effort to complete the 2017 Cash Flow Statement. In addition, your team will also prepare “Common Sized Financial Statements” for the 2 years shown. In the Unit 1 Seminar, you discussed how to complete and use the 2017 Cash Flow Statement outcomes to explain how specific accounts influenced Bob’s low cash balances; in other words, some reasons why Bob has no cash!
This information allows you to substantiate the 2018 loan denial or renewal request. Your team is the bank’s loan committee, and you will address an internal memo to the loan officer in charge of this loan facility, giving the committee’s decision on whether to approve the loan as is, renew the loan with modifications, or deny the loan request. Be sure you move away from definitions to analysis. You do not need to give definitions of balance sheet accounts.
The Balance Sheets and Cash Flow Statements provided in the data worksheet below will assist you in your analysis. From these documents, and from the ones you produced, discuss the following:
The operating cycle of the company
The covenants within the CC&Rs that the company did not comply with
The Common Sized Financial Statement (CC&R’s)
The Cash Flow Statement
What did management do to fall short of the minimum cash requirements?
Was the company’s failure to meet cash balance requirements a result of the company being unable to meet the requirement or because of management actions?
What could be management’s motivation for not complying with the loan’s CC&Rs?
Where was the major portion of the company’s working capital used?
What could management have done to comply with the CC&Rs they agreed to?
Finally, what does your loan committee want to do about the renewal of this loan? In this area, you can:
Renew the loan without changing the loan conditions.
Renew the loan and modify the conditions to what is now required by the bank to receive loan approval.
Decline the loan.
Remember that banks approve or deny loans based on the 5 Cs of credit, which are:
Character
Capacity
Capital
Collateral
Conditions
Your loan committee should discuss these when deliberating what to do with this loan and include an overview of this discussion in the memo to the company’s loan officer.
In your memo:
Include a strong thesis statement, introduction, and conclusion. The main points of the response should be developed and explained clearly in the memo with appropriate financial and accounting terminology.
Support all arguments (no errors in logic) based upon the Statement of Cash Flows data.
Exhibit strong higher-order critical thinking and include appropriate judgments, conclusions, and assessments based on the team’s analysis of the Balance Sheet and Statement of Cash Flows.
Provide proper classifications, explanations, comparisons, and inferences based on the cash flow representations. Your submission should include recognition of accounts, and the team’s work should be reconciled back to the financial data provided.
Unformatted Attachment Preview
XYZ Bank told Bob to increase cash to $70,000 from 2016 to 2017. But cash increased from $16,566 in 2016 to just $33,411 in 2017, well short of
$70,000. In this assignment, you will review six select changes in the Balance Sheet accounts, highlighted in yellow, to bett er understand how these
individual account changes impact overall cash flows.
2017 and
2016
Comparative
ASSETS
2017
Cash
2016
Items 1 to 6. Note the $ value
effect on Cash. Did the change in
balances from one year to the
next create (+) or ‘use’ (-) cash?
Note the accounting or finance
issue related to each of the six
accounts reviewed.
$ $
33,411
$
$ 16,566
Accounts Receivable
$
260,205
$
318,768
Inventory
$
423,819
$
352,740
Other current assets
Total Current Assets
$
$
41,251
758,686
$
$
29,912
717,986
Plant Property and Equipment
$
1,512,675
$
1,403,220
$
$
382,145
2,653,506
$
$
412,565
2,533,771
Accounts Payable
$
378,236
$
332,004
46,232
Wages Payable
Accrued income taxes
Total Current Liabilities
$
$
$ $
14,487
21,125
413,848
$
7,862
$
16,815
$ $ 356,681
6,625
4,310
57,167
Long-Term Debt: Bank Notes
$
679,981
$
793,515
(113,534)
Total Liabilities
Total Common Equity
Total Liabilities and Equity
$
$
$
1,093,829
1,559,677
2,653,506
$
$
$
1,150,196
1,383,575
2,533,771
(56,367)
176,102
119,735
Goodwill and other assets
Total Assets
71,079
$
$
(11,339)
(40,700)
109,455
$
30,420
(119,735)
LIABILITIES AND EQUITY
$
$
Needed to foot the Cash Flow Statement all the way
back to 2017 cash position.
Net Income
$3,155,848
Depreciation
212,366
Dividends Paid
2,966,412
Tax
225,700
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