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 When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original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.

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 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 company's 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 company's 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:

Renew the loan without changing the loan conditions.

Renew the loan and modify the conditions to what is now required by the bank to receive loan approval.

Decline the loan.

Remember that banks approve or deny loans based on the 5 Cs of credit, which are:

Character

Capacity

Capital

Collateral

Conditions

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. KYZ 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 570,000 . In this assignment, you will review six select changes in the Balance Sheet accounts, highlighted in yellow, to better understand how these ndividual arrount rhanpes imnart nverall rach flows: Year End 2017 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. KYZ 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 570,000 . In this assignment, you will review six select changes in the Balance Sheet accounts, highlighted in yellow, to better understand how these ndividual arrount rhanpes imnart nverall rach flows: Year End 2017