Bonanza Inc. (Bonanza) is a small manufacturer of home environmental products such as humidifiers, air cleaners, and ionizers. Bonanza's products are sold in retail stores across Canada and in the United States. Bonanza's product line has been well received by consumers over the years, although many products haven't changed for many years. The president is concerned that the company cash position has been deteriorating in recent years and she has approached your organization for a significant loan to provide the company with additional working capital, as well as to purchase capital assets that need to be replaced. The president has provided income statements and balance sheets for the most recent years.

Additional information:

• The long-term debt is due to be repaid in early 2019. The amount is owed to a large bank and is secured against certain capital assets.

• Capital asset purchases are paid for in cash.

• Bonanza has a $260,000 line of credit available from its bank. Bank loans represent the amount borrowed against the line of credit.

• All sales to customers and purchases of inventory are made on credit.

• Interest expense is included in selling, general, and administrative expenses.

Interest expense was $115,000 in 2017, $102,000 in 2016, and $48,000 in 2015.

Required:

Prepare a report to the corporate lending department evaluating the liquidity and solvency of Bonanza. Provide a preliminary recommendation on whether the loan should be made. Provide support for your recommendation. What additional information would you want before reaching a final decision on the loan application? In your analysis, consider Bonanza's cash flow.

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Вопаnza Inc. Income Statements For the Years Ended July 31, 2017 2016 2015 Sales $3,704,000 $3,963,280 $3,923,646 Cost of sales 2,077,944 2,199,620 2,150,158 Selling, general, and administrative expenses 1,304,108 1,341,516 1,312,422 Depreciation 220,000 204,000 196,000 Research and development 90,000 176,000 250,000 Gain on sale of investment (126,000) Income tax expense 26,000 6,000 2,000 Net Income $ 111,948 %24 36,144 $ 13,066 Bonanza Inc. Balance Sheets As of July 31, 2017 2016 2015 2014 Cash $ 11,158 $ 53,210 $ 11,066 S 80,000 Receivables 550,000 430,000 360,000 290,000 Inventory 630,000 420,000 364,000 330,000 Prepaid expenses 102,000 56,000 162,000 30,000 Current assets 1,293,158 959,210 897,066 730,000 Capital assets (net of depreciation) 1,298,000 1,220,000 1,080,000 820,000 Investment, at cost 150,000 150,000 $2,591,158 $2,329,210 $2,127,066 $1,550,000 Bank loans $ 250,000 $ 184,000 $ 94,000 Accounts payable and accrued liabilities 700,000 616,000 540,000 420,000 Current liabilities 950,000 800,000 634,000 420,000 Long-term debt 350,000 350,000 350,000 Common shares 1,000,000 1,000,000 1,000,000 1,000,000 Retained earnings 291,158 179,210 143,066 130,000 $2,591,158 $2,329,210 $2,127,066 $1,550,000