Requirements:

This part of the assessment represents the primary steps of understanding the nature of cash flows in a business. Year-to-year comparative balance sheets are used in the analysis. After review and analysis of the data, you will prepare a business memo to outline the sources or uses of specific account cash flows and how these outcomes support your reasoning for approving or denying the loan. The analysis is based upon year-to-year changes of these specific balance sheet sections: Accounts Receivable, Inventory, Accounts Payable, Wages Payable, Plant Property and Equipment, and Long-term Debt.

Scenario: You are required to conduct an analysis of specific financial data of Bob Smith, Inc. 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 When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original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.

You will need to complete the 2017 Cash Flow Statement. In addition, you will also prepare the Common Sized Financial Statements for the 2 years shown.

This information allows you to substantiate the 2018 loan denial or renewal request. You are acting as the loan committee of the bank and you will address an internal memo to the loan officer in charge of this loan facility giving the committees decision on whether to approve the loan as is, renew the loan with modifications, or deny the loan request. Be sure you move away from definitions to analysis. Additionally, you do not need to give definitions of balance sheet accounts.

The Balance Sheets and Cash Flow Statements provided in the data worksheet below will assist you in your analysis. From these documents, and from the ones you produced, discuss the following:

• The operating cycle of the company
• The covenants within the CC&Rs that the company did not comply with.
• The Common Sized Financial Statement (CC&Rs)
• The Cash Flow Statement
• What did management do to fall short of the minimum cash requirements?
• Was the companys failure to meet cash balance requirements a result of the company being unable to meet the requirement or because of management actions?
• What could be managements motivation for not complying with the loans CC&Rs?
• Where was the major portion of the companys working capital used?
• What could management have done to comply with the CC&Rs they agreed to?
• Finally, what does your loan committee want to do about the renewal of this loan? In this area, you can:
  1. Renew the loan without changing the loan conditions.
  2. Renew the loan and modify the conditions to what is now required by the bank to receive loan approval.
  3. Decline the loan.

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CC&Rs for Bob Smith, Inc. 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 bank's explicit approval. Teams will consider compliance with the loan's CC&Rs as part of their loan approval process. XYZ Bank told Bob to increase cash to $70,000 from 2016 to 2017. But cash increased from $16,566 in 2016 to just $33,411 in 2017, well short of $70,000. In this assignment, you will review six select changes in the Balance Sheet accounts, highlighted in yellow, to better understand how these individual account changes impact overall cash flows. Needed to foot the Cash Flow Statement all the way 2017 and 2016 Comparative ASSETS 2017 2016 back to 2017 cash position. Net Income Depreciation Dividends Paid $3,155,848 212,366 2,966,412 225,700 Tax Iteins 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 $ 318,768 Inventory $ 423,819 $ 352,740 71,079 Other curent assets Total Current Assets $ $ 41.251 758.686 $ $ 29.912 5 717-986 $ (11.339) (40,700) Plant Property and Equipment $ 1.512,675 $ 1.403.220 109,455 Goodwill and other assets $ $ 382.145 2,653,506 $ 412.565 $ $ 2.533.771 30.420 (119.735) Total Assets LIABILITIES AND EQUITY Accounts Payable $ 378,236 $ 332.004 46,232 6,625 Tages Payable Accrued income taxes Total Current Liabilities $ $ $ $ 14.487 21.125 413.848 $ 7.862 $ 16,815 5 $ $ 356.681 $ 4310 57.167 Long-Term Debr: Bank Notes $ 679.981 5 793, 515 (113,534) Total Liabilities Total Common Equity Total Liabilities and Equity $ $ $ 1,093,829 1.559.677 2,653.506 $ $ $ 1,150,196 1.383.575 2.533,771 (56,367) 176,102 119,735 CC&Rs for Bob Smith, Inc. 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 bank's explicit approval. Teams will consider compliance with the loan's CC&Rs as part of their loan approval process. XYZ Bank told Bob to increase cash to $70,000 from 2016 to 2017. But cash increased from $16,566 in 2016 to just $33,411 in 2017, well short of $70,000. In this assignment, you will review six select changes in the Balance Sheet accounts, highlighted in yellow, to better understand how these individual account changes impact overall cash flows. Needed to foot the Cash Flow Statement all the way 2017 and 2016 Comparative ASSETS 2017 2016 back to 2017 cash position. Net Income Depreciation Dividends Paid $3,155,848 212,366 2,966,412 225,700 Tax Iteins 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 $ 318,768 Inventory $ 423,819 $ 352,740 71,079 Other curent assets Total Current Assets $ $ 41.251 758.686 $ $ 29.912 5 717-986 $ (11.339) (40,700) Plant Property and Equipment $ 1.512,675 $ 1.403.220 109,455 Goodwill and other assets $ $ 382.145 2,653,506 $ 412.565 $ $ 2.533.771 30.420 (119.735) Total Assets LIABILITIES AND EQUITY Accounts Payable $ 378,236 $ 332.004 46,232 6,625 Tages Payable Accrued income taxes Total Current Liabilities $ $ $ $ 14.487 21.125 413.848 $ 7.862 $ 16,815 5 $ $ 356.681 $ 4310 57.167 Long-Term Debr: Bank Notes $ 679.981 5 793, 515 (113,534) Total Liabilities Total Common Equity Total Liabilities and Equity $ $ $ 1,093,829 1.559.677 2,653.506 $ $ $ 1,150,196 1.383.575 2.533,771 (56,367) 176,102 119,735