Question
Help please ! RATIO ANALYSIS It is January of 2008 and you are now a loan officer at First Bank. Among your first assignments is
Help please !
RATIO ANALYSIS
It is January of 2008 and you are now a loan officer at First Bank. Among your first assignments is to decide on the merits of making a four year $40,000 loan to a local merchant, Howard's Apparel The company deals in upscale fashions for women.
The proprietors are Marcia and John Howard, who began the business in January of 2006. Generally, Marcia is responsible for managing the retail operations, while John keeps the books.
The business has been successful beyond the wildest dreams of the owners, so much so that in two short years, the Howards have already embarked on expansion. At the end of 2007, they signed a lease on a second store and invested significantly in new fixtures. Now, they need to borrow $40,000 for, among other things, inventory for the new location. Approximately half of the loan will be used for this purpose, with the remainder to provide operating funds.
The Howards have a good reputation in the community and have established a steady customer base for their goods. There is every reason to expect that a second location will do equally well as the first.
If there has been a problem over the past two years, it has been an excessive work load in the administrative area. Since John Howard remains employed at the courier company, he has only a modest amount of time to devote to accounting and other administrative functions. After struggling for a year with this dilemma, the Howards hired an accounting clerk to assist John. This has provided the required manpower, but at a significant increase in administrative costs.
It is up to you to decide whether the Howards should receive the loan. Please prepare a report on the subject, backing up your conclusions with appropriate references to financial ratios. The companys financial statements appear below.
HOWARDS APPAREL - COMPARATIVE BALANCE SHEET
2007 2006
Current Assets
Cash 7380 21645
Accounts Receivable 29520 28260
Inventory 20700 18900
Prepaid Expenses 14190 2070
Total 71790 70875
Fixed Assets
Fixtures (net) 118268 103123
Total Assets 190058 173998
Liabilities
Current Liabilities
Notes Payable 3500 0
Accounts Payable 28500 19090
Other Payables 3600 2550
Total 35600 21640
Owners Equity
Capital 154458 152358
Total Liabilities and Equity 190058 173998
HOWARDS APPAREL - COMPARATIVE INCOME STATEMENT
2007 2006
Revenue
Net Sales 285900 231300
Cost of Goods Sold
Inventory Jan. 1 18900 18000
Purchases 138629 120500
Total 157529 138500
Less Inventory Dec 31 20700 18900
Cost of Goods Sold 136829 119600
Gross Profit on Sales 149071 111700
Selling Expense 47389 39060
Admin Expense 65292 37890
Total 112681 76950
NET INCOME 36390 34750
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