Financial Analysis for Loan Decision

LO 5 Financial Analysis for Loan Decision

C 4. Krys Ciskowski was recently promoted to loan officer at First Federal Bank. He has authority to issue loans up to $75,000 without approval from a higher

CHAPTER 4 Financial Reporting and Analysis Zavala Supplies, Inc., is a local lumber and home improvement company.

Because sales have increased so much during the past two years, Zavala Supplies has had to raise additional working capital, especially as represented by receivables and inventory. The $75,000 loan is needed to assure the company of enough working capital for the next year. Zavala Supplies began the year with total assets of $1,110,000 and stockholders’ equity of $390,000. During the past year, the company had a net income of $60,000 on net sales of $1,140,000. Zavala Sup- plies’ unclassified balance sheet as of the current date appears as follows:

Assets Liabilities and Stockholders’ Equity

Cash

$ 300,000 Accounts receivable (net)

Accounts payable

150,000 Inventory 375,000 Notes payable (long term)

Notes payable (short term)

300,000 Land 75,000 Common stock

375,000 Buildings (net)

75,000 Equipment (net)

Retained earnings

Total liabilities and stockholders’ equity $1,200,000 Total assets

Shoji Fashions, Inc., has for three years been a successful clothing store for young professional women. The leased store is located in the downtown financial district. Shoji’s loan proposal asks for $75,000 to pay for stocking a new line of women’s suits during the coming season. At the beginning of the year, the com- pany had total assets of $300,000 and total stockholders’ equity of $171,000. Over the past year, the company earned a net income of $54,000 on net sales of $720,000. The firm’s unclassified balance sheet at the current date is as follows:

Assets Liabilities and Stockholders’ Equity

Cash

$120,000 Accounts receivable (net)

Accounts payable

15,000 Inventory 202,500 Common stock

75,000 Accrued liabilities

75,000 Prepaid expenses

150,000 Equipment (net)

Retained earnings

Total liabilities and stockholders’ equity $360,000 Total assets

1. Prepare a financial analysis of each company’s liquidity before and after receiv- ing the proposed loan. Also compute profitability ratios before and after, as appropriate. Write a brief summary of the effect of the proposed loan on each company’s financial position.

2. Assume you are Krys Ciskowski and can make a loan to only one of these companies. Write a memorandum to the bank’s vice president outlining your decision and naming the company to which you would lend $75,000. Be sure to state what positive and negative factors could affect each company’s ability to pay back the loan in the next year. Also indicate what other infor- mation of a financial or nonfinancial nature would be helpful in making a final decision.

257 LO 3 LO 4 Classified Balance Sheet and Multistep Income Statement

Chapter Assignments

LO 5 C 5. Refer to the CVS annual report in the Supplement to Chapter 1 to answer the following questions.

1. Consolidated balance sheets:

a. Did the amount of working capital increase or decrease from 2007 to 2008? By how much?

b. Did the current ratio improve from 2007 to 2008?

c. Does the company have long-term investments or intangible assets?

d. Did the debt to equity ratio of CVS change from 2007 to 2008?

e. What is the contributed capital for 2008? How does contributed capital compare with retained earnings?

2. Consolidated statements of operations:

a. Does CVS use a multistep or single-step income statement?

b. Is it a comparative statement?

c. What is the trend of net earnings?

d. How significant are income taxes for CVS?