Question 1 (20 marks)

Assume that you are a loan officer of a bank. A local church is seeking a $4 million, 20year loan to construct a new classroom building. Church officers submit a comprehensive financial report that was audited by a reputable CPA firm. In summary form (the actual statement showed details), the churchs statement of revenues and expenditures indicated the following (in millions):

Revenues from dues and contributions $1.8

Revenues from other sources 0.2

Total revenues $2.0

Less: total expenditures 2.0

Excess of revenues over expenditures $0.0

The church prepared its financial statements on a nearcash basis, accounting for all capital asset acquisitions as expenditures when acquired.

The churchs balance sheet reported assets, mainly cash and investments (at market value), of $0.2 million. In addition, a note to the financial statements indicated that equipment is approximately $3 million. The church has no outstanding debt.

1. Is there any information in the financial statements that would make you reluctant to approve the loan? If so, indicate and explain.

2. Is there any other financial information of the type likely to be reported in a conventional annual report that you would like to review prior to making a loan decision? If so, indicate and explain.

3. Is there any other information, of any type, that you would like to review prior to making a loan decision? If so, indicate and explain.

4. Comment on the inherent limitations of the financial statements of this church, or any comparable notforprofit organization, as a basis for making loan decisions.