PLEASE SHOW WORK!!

1. Given Erics philosophy of just-in-time in meeting customer requirements, is he too accommodating in this inventory policies, and could this potentially lead to a cash-flow problem? Do you have any specific suggestions or recommendations, such as a loan covenant limiting inventory to a certain percentage of sales? Type your three- to four-sentence response below.

2. What is your assessment for receivables in terms of credit quality? In other words, how did Office Smart increase its market sharepossibly by lowering credit standards? Would it be prudent to ask for detailed data on receivables for at least the top 10 customers? Type your three- to four-sentence response below.

3. What documentation will you require? Customary documentation includes monthly income statements, statements of cash flows, and balance sheets. In addition, you may wish to see data on forecast economic activity in the ConnecticutMassachusettsRhode Island area, student enrollment projections at area universities, tax returns for each year, and other information that supports the loan. Type your three- to four-sentence response below.

4. Which firm would be acceptable as an outside auditor? Is your bank going to be satisfied with a local accounting firm that may have Office Smart as an important client? Recall that Arthur Andersen was differential to Enron on its audit due to substantial consulting fees and the fear of losing that company as a client. Type your three- to four-sentence response below.

In considering any new credit arrangement with a financial institution, Eric would prefer to sign a simple promissory note and not have any loan covenants, consistent with his prior arrangement with the New Haven bank. You have listened to his request but think loan covenants must be part of any lending arrangement. Your assignment includes the preparation of such covenants that should be included in the loan agreement. Additionally, you need to consider whether the working capital loan will require an annual cleanup (i.e., repayment in full for, say, 30 days), or if it will be a term loan, and if it is a term loan, for how long and with what, if any, amortization. You have already talked to a few of the companys customers to verify the story presented by Farland. To summarize their report: Office Smart delivers, pure and simple. We dont get the runaround about slow deliveries, poor instal- lation or repair work, or inept service people. I dont think Eric has ever failed to deliver on time to our locations. And he is a funny, delightful guy with whom we like to have drinks and laughs. FINANCIAL ISSUES In your discussions with Eric, he has stressed that sales in 2008 will in all likelihood be a record year, reflecting a tremendous growth in market share and expectations of record numbers of systems installations and upgrades. Although the borrow- ings from his prior bank never quite reached $200,000, Eric is certain with these expanded sales forecasts that he will need a $400,000 working capital line of credit. In talking to Eric you were emphatic that it was critical to keep borrowings within the $400,000 limit, as your management was quite conservative and was not willing to see borrowers exceed their credit limits under any conditions. Pricing is open, but youas the account officerbelieve the prime rate plus 2 percent is appropriate. The company will provide you with unaudited quarterly financials, and yearend financials will be audited by a local New Haven accounting firm. In assessing loan covenants that you would require, it may be quite helpful to project the revenues for fiscal 2008. You should consider what might be receiv- able and inventory levels, and the resulting borrowings. In talking to your credit department, one analyst noted concerns over the future value of inventory, not- ing that certain Office Smart technology could become obsolete and not salable at market rates due to new developments in computers and telecommunications. There are several questions that should be considered in the Office Smart case as you decide on the best approaches to doing business with Eric Farland.

	Office smart	Industry
Current ratio	1.52	2.1
Quick ratio	0.61	1.8
Debt ratio %	65.5	65.9
Inventory trunover	2.3	37.3
Receivables turnover	8.3	7.4
Asset turnover	2.5	3.2
Return on equity	92.1	78
Return on sales	12.7	8.4

Income Statemnet	2006	2007
Net sales	$4,725	5075
Costs of goods sold
Beginning Inventory	700	788
Purchases	2538	2713
Ending Invenotry	875	1050
Net Cost of Goods Sold	2,363	2450
Gross Profit	2363	2625
Operating expense	1400	1,444
Interest expense	88	105
Net income before taxes	875	1,076
income taxes	350	431
net income	525	645
Balance sheets
Cash	88	88
Accoutns recevable	525	612
Inventory	875	1,050
current assets	1488	1750
property, net	262	280
total assets	1750	2030