This assignment 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.

Instructions: Read the scenario, and then access the data worksheet below. Review the grading rubric, which provides some tips on how to organize your team process.

Scenario: The team assignment requires 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 When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original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 team assignment requires participation in a team effort to complete the 2017 Cash Flow Statement. In addition, your team will also prepare “Common Sized Financial Statements” for the 2 years shown. In the Unit 1 Seminar, you discussed how to complete and use the 2017 Cash Flow Statement outcomes to explain how specific accounts influenced Bob’s low cash balances; in other words, some reasons why Bob has no cash!

This information allows you to substantiate the 2018 loan denial or renewal request. Your team is 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 committee’s 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. 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&R’s)
• 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 management’s motivation for not complying with the loan’s 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:
  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.

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

• Character
• Capacity
• Capital
• Collateral
• Conditions

Your loan committee should discuss these when deliberating what to do with this loan and include an overview of this discussion in the memo to the company’s loan officer.

In your memo:

• Include a strong thesis statement, introduction, and conclusion. The main points of the response should be developed and explained clearly in the memo with appropriate financial and accounting terminology.
• Support all arguments (no errors in logic) based upon the Statement of Cash Flows data.
• Exhibit strong higher-order critical thinking and include appropriate judgments, conclusions, and assessments based on the team’s analysis of the Balance Sheet and Statement of Cash Flows.
• Provide proper classifications, explanations, comparisons, and inferences based on the cash flow representations. Your submission should include recognition of accounts, and the team’s work should be reconciled back to the financial data provided.