2) Brook Plumbing has a line of credit of $800,000 with peak usage in August and a low point in January. The company's notes payable (the amount outstanding on the line of credit) at year end has been increasing, while long-term debt is decreasing. Sales increased at a rate of between 12 and 13 percent in the last two years. The company expects continued growth and has requested a long-term loan of $200,000 to support the increases in inventory and accounts receivable. What would be your reaction to this request?

A) Suggest a different approach. Increase the line of credit to keep up with sales growth, and there will be no need for the term loan. B) Find out more. The request for long-term financing for core current assets makes sense, but the company is also experiencing collection problems and a slowdown in inventory days on hand from 20Y2 to 20Y3. Solving those problems may alter its financing needs. C) Decline. With sales of only $6 million, and the size of the line of credit, there should be no need for additional long-term debt. D) Approve. The request makes sense given the sales growth and corresponding increases in accounts receivable and inventory.

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Agings of Accounts Receivable 2093 31-Mar 30-Jun Days from Date of Invoice Days from Date of Invoice 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 250,000 310,000 130,000 100,100 790,100 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 360,000 330,000 70,000 40,000 800,000 30-Sep 31-Dec - - - - - - Days from Date of Invoice Days from Date of Invoice 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 300,000 310,000 125,500 60,000 795,500 0-30 31-60 61-90 Total Invoices Outstanding 345,000 205,000 185,000 50,400 785,400 90+ Total accounts receivable 2072 2071 Balance Sheets 20Y3 ASSETS Current assets Cash and equivalents 110 Accounts receivable 785 Inventory 1075 Other current assets 40 Total current assets 2,010 97 154 770 902 885 1,020 44 23 1,870 2,025 327 Fixed assets Gross fixed assets Less: Accumulated depreciation Net fixed assets 335 117 218 331 100 89 231 238 Other noncurrent assets 97 99 95 TOTAL ASSETS 2,325 2,200 2,358 473 136 551 155 LIABILITIES AND EQUITY Current liabilities Accounts payable Accrued expenses Other current liabilities Notes payable Current portion-LTD Total current liabilities 528 143 99 486 91 117 592 490 66 62 1,354 68 1,381 1,322 Long-term debt 143 209 277 Other noncurrent liabilities 35 33 37 Owners' equity 793 636 663 TOTAL LIABILITIES AND EQUITY 2,325 2,200 2,358 Monthly Sales 2013 405 20Y2 398 455 405 450 455 January February March April May June July August September October November December 480 496 575 610 615 640 597 520 545 570 590 543 532 556 505 459 439 465 Quick Cash Flow 20Y2 102 2093 157 12 20 198 312 304 0 0 304 (68) (68) 236 BEGINNING ENDING 885 770 1020 902 551 528 155 143 | 1199 1001 Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross fixed assets Equals: Cash after capital investment cycle Less: Dividends declared Equals: Cash available for all debt repayment Less: Current portion long- term debt (prior year) Equals: Cash available for other debt repayment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment 1199 1001 198 BEGINNING ENDING BEGINNING ENDING Company Information Brook Plumbing Supply Company is a wholesale distributor of plumbing products to building contractors and the trades. The company sells nearly all the parts and tools that plumbing companies need; it also sells to retail customers. Brook Plumbing was started and is owned by two brothers, Sam and David Brook, and has been in business for more than 25 years. The brothers have always managed all significant areas of the business without assistance. Brook's main office and warehouse are located in a medium-sized city. The company also has a branch sales office in a nearby community. Brook purchases plumbing supplies directly from manufacturers' representatives. Since almost all of the products are generic, the Brooks use several different sources. A recent trade checking shows them to be discount-to-prompt with all vendors. Brook Plumbing competes with other local building supply and plumbing wholesalers and hardware stores, and several national chain stores. Brook has built a reputation for meeting the special needs of local contractors and the trade- customers who require fast service, credit, and product expertise. Brook's sales representatives will visit building sites with contractors and even help them prepare bids and lay out jobs. Almost all of this work produces sales. This organization has been Brook Plumbing's only financial institution for two years. Agings of Accounts Receivable 2093 31-Mar 30-Jun Days from Date of Invoice Days from Date of Invoice 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 250,000 310,000 130,000 100,100 790,100 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 360,000 330,000 70,000 40,000 800,000 30-Sep 31-Dec - - - - - - Days from Date of Invoice Days from Date of Invoice 0-30 31-60 61-90 90+ Total accounts receivable Total Invoices Outstanding 300,000 310,000 125,500 60,000 795,500 0-30 31-60 61-90 Total Invoices Outstanding 345,000 205,000 185,000 50,400 785,400 90+ Total accounts receivable 2072 2071 Balance Sheets 20Y3 ASSETS Current assets Cash and equivalents 110 Accounts receivable 785 Inventory 1075 Other current assets 40 Total current assets 2,010 97 154 770 902 885 1,020 44 23 1,870 2,025 327 Fixed assets Gross fixed assets Less: Accumulated depreciation Net fixed assets 335 117 218 331 100 89 231 238 Other noncurrent assets 97 99 95 TOTAL ASSETS 2,325 2,200 2,358 473 136 551 155 LIABILITIES AND EQUITY Current liabilities Accounts payable Accrued expenses Other current liabilities Notes payable Current portion-LTD Total current liabilities 528 143 99 486 91 117 592 490 66 62 1,354 68 1,381 1,322 Long-term debt 143 209 277 Other noncurrent liabilities 35 33 37 Owners' equity 793 636 663 TOTAL LIABILITIES AND EQUITY 2,325 2,200 2,358 Monthly Sales 2013 405 20Y2 398 455 405 450 455 January February March April May June July August September October November December 480 496 575 610 615 640 597 520 545 570 590 543 532 556 505 459 439 465 Quick Cash Flow 20Y2 102 2093 157 12 20 198 312 304 0 0 304 (68) (68) 236 BEGINNING ENDING 885 770 1020 902 551 528 155 143 | 1199 1001 Net profit Plus: Depreciation, amortization expense Plus (or less): A Working investment Equals: Cash after operating cycle Plus (or less): A Gross fixed assets Equals: Cash after capital investment cycle Less: Dividends declared Equals: Cash available for all debt repayment Less: Current portion long- term debt (prior year) Equals: Cash available for other debt repayment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment Change in working Accounts receivable (net) Plus: Inventory Less: Accounts payable Less: Accrued expenses Equals: Working investment Beginning working investment Less: Ending working investment Equals: A Working investment 1199 1001 198 BEGINNING ENDING BEGINNING ENDING Company Information Brook Plumbing Supply Company is a wholesale distributor of plumbing products to building contractors and the trades. The company sells nearly all the parts and tools that plumbing companies need; it also sells to retail customers. Brook Plumbing was started and is owned by two brothers, Sam and David Brook, and has been in business for more than 25 years. The brothers have always managed all significant areas of the business without assistance. Brook's main office and warehouse are located in a medium-sized city. The company also has a branch sales office in a nearby community. Brook purchases plumbing supplies directly from manufacturers' representatives. Since almost all of the products are generic, the Brooks use several different sources. A recent trade checking shows them to be discount-to-prompt with all vendors. Brook Plumbing competes with other local building supply and plumbing wholesalers and hardware stores, and several national chain stores. Brook has built a reputation for meeting the special needs of local contractors and the trade- customers who require fast service, credit, and product expertise. Brook's sales representatives will visit building sites with contractors and even help them prepare bids and lay out jobs. Almost all of this work produces sales. This organization has been Brook Plumbing's only financial institution for two years