Do you believe the company would qualify for the loan? What advice would you give to Russ concerning the machine?

Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.

Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.

Russ would like to apply for a $80,000 six-month loan bearing an interest rate of 10% per year. The unaudited financial reports of the company appear below:

Venice InLine, Inc. Comparative Balance Sheet As of December 31 (dollars in thousands)
	This Year	Last Year
Assets
Current assets:
Cash	$ 70	$ 150
Accounts receivable, net	50	40
Inventory	160	100
Prepaid expenses	10	12
Total current assets	290	302
Property and equipment	270	180
Total assets	$560	$482
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable	$ 154	$ 90
Accrued liabilities	10	10
Total current liabilities	164	100
Long-term liabilities
Total liabilities	164	100
Stockholders equity:
Common stock and additional paid-in capital	100	100
Retained earnings	296	282
Total stockholders equity	396	382
Total liabilities and stockholders equity	$560	$482

Venice InLine, Inc. Income Statement For the Year Ended December 31 (dollars in thousands)
	This Year
Sales (all on account)	$420
Cost of goods sold	290
Gross margin	130
Selling and administrative expenses:
Selling expenses	42
Administrative expenses	68
Total selling and administrative expenses	110
Net operating income	20
Interest expense
Net income before taxes	20
Income taxes (30%)	6
Net income	$ 14

Last year Russ purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Russ had originally planned to sell the old machine but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Russ discussed his cash flow problems with his brother-in-law, he suggested to Russ that the old machine be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of $45,000. The bank does not require audited financial statements.