Should We Make the Loan?

Save More, Inc., a discount department store, has applied to its bankers for a loan. Although the company has been profitable, it is short of cash. The loan application includes the following information about current assets, current liabilities, net income, depreciation expense, and dividends for the past five years. (All numbers are rounded to the nearest thousand, with the 000’s omitted.)

As a bank loan officer, you have been asked to review these figures in order to determine whether the bank should loan money to Save More, Inc.
1. Compute the net cash flows from operations for the last four years.
2. What caused the sudden decrease in cash flows from operations?
3. What factors would you focus on, and what additional information would you need before deciding whether to make the loan?

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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2004 2005 2006 2007 2008 Cash and cash equivalents $ 5 $ 73 $ 10 $158 $ (189) Accounts receivable (net) 403 555 516 576 654 Inventory... 253 142 383 385 1,022 Accounts payable 19 17 281 253 52 Net income 454 492 467 440 481 Depreciation expense 50 50 55 60 60 Dividends paid 177 197 208 211 211