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 When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original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.

Please prepare Common Sized Financial Statements for the 2 years shown. Answer two questions below

What could be managements motivation for not complying with the loans CC&Rs?

Where was the major portion of the companys working capital used?

During the original loan, the bank included, as part of the loan documentation, a document called Covenants, Conditions & Restrictions (CC&Rs), which the company had to comply with to maintain its credit facility with the bank. The major conditions of this included: 1. The company will maintain at least $70,000 in their DDA (noninterest bearing checking) at all times as compensating balances against their loan. 2. The company will maintain a current ratio of at least 2:1. 3. The company will maintain a quick ratio of at least 1.5:1. 4. The company will not increase officer salaries by more than 5% while the loan is outstanding. 5. The company will not pay bonuses to officers without the banks explicit approval.

2017 and 2016 Comparative ASSETS 2017 2016 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 2,966,412 225,700 Tax 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. Cash $ $ 33,411 $ $ 16,566 Accounts Receivable $ 260,205 S $ 318,768 Inventory $ 423,819 S 352,740 71,079 Other current assets Total Current Assets $ $ 41,251 758,686 $ s 29,912 $ 717.986 $ (11,339) (40,700) Plant Property and Equipment 1,512,675 $ 1.403.220 109,455 Goodwill and other assets Total Assets $ S $ 382,145 2.653.506 $ 412,565 $ $ 2.533.771 30,420 (119.735) LIABILITIES AND EQUITY Accounts Payable $ 378,236 $ 332,004 46,232 Wages Payable Accrued income taxes Total Current Liabilities $ 14.487 $ 21,125 $$ 413,848 S 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 S $ 1,150,196 1,383,575 2,533,771 (56,367) 176,102 119.735 $