You are a loan officer for National Bank. You have a loan application submitted by a company for $50,000. This company just got a prior loan for $45,000 and has not made the first payment. This gives you an uneasy feeling as you examine a loan application from ABC, Co. The application included the following financial statements.

ABC, Co.

Income

Statement

For the Year Ended December 31, 2016

Sales revenue $100,000

Cost of goods sold (50,000)

Depreciation expense (5,000)

Remaining expenses (25,000)

Net income $20,000

ABC, Co.

Balance Sheet

December 31, 2016

Cash $5,000

Accounts receivable 25,000

Inventory 20,000

Equipment $55,000

Accumulated depreciation (5,000)

Total $100,000

Accounts payable $10,000

Interest payable 5,000

Note payable 45,000

Common stock 20,000

Retained earnings 20,000

Total $100,000

It is not ABCs profitability that worries you. The income statement submitted with the application shows net income of $20,000 in the first year of operations. By referring to the balance sheet, you see that this net income represents a 20% rate of return on assets of $100,000. Your concern stems from the recollection that the note payable reported on ABC, Cos. balance sheet is a two-year loan you approved earlier in the year.

You also recall another promising new company that, just last year, defaulted on another of your bank's loans when it failed due to its inability to generate sufficient cash flows to meet its obligations. Before requesting additional information from ABC, Co. you decide to prepare a statement of cash flows from the information available in the loan application.

Required:

1. Write a Memo to the President of ABC, Co. of 250 - 300 words.

2. Prepare the statement of cash flows using the indirect method. All beginning balance sheet accounts are .00

3. Explain the banks position on the loan.

4. Would you approve the loan or deny the loan?

5. What aspects of the financial statements would deny or merit the new loan?

6. Give both financial statement analysis and any lending comments in your memo.