Gary went to the Florence National Bank to inquire about funding for the new store location. He
Question:
Gary went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $350,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking.
He brought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $350,000.
Michael Tightwad, the local bank loan vice president had been a friend of Gary's for many years. He was a customer at Gary's jewelry store and purchased his wedding ring set from Gary's store, and his bank had underwritten the funding for the second store. Michael was excited about Gary's expansion goals and the prospect of another business loan with his friend. At the same time, Michael had to live up to his reputation and because of interest rates being what they are, he had to be very critical of any loan coming across his desk. He was not about to approve a loan unless he was almost 100 percent sure that the borrower would not default. Gary's past success had alleviated much of Michael's concern, but he still wanted a detailed analysis of the financial performance of Queens Jewelry Products during the last calendar year. Upon reviewing the balance sheet, Michael knew with the covid pandemic last year, foot traffic was reduced at many retail stores, but Queens Jewelry Products showed a strong profitable performance.
The current financial statements did not seem to give enough information to answer Michael's questions and he asked Gary for a statement of cash flows for the year ending December 31, 20xx. Gary has come to you for some help with this loan.
Additional transaction data
A. Purchased $310,000 in plant assets by paying cash.
B. Sold plant assets with a cost of $55,000 and accumulated depreciation of $15,000, yielding a gain of $10,000.
C. Received $90,000 cash from issuance of notes payable.
D. Paid $10,000 cash to retire notes payable.
E. Received $120,000 cash from issuing shares of common stock.
F. Paid $20,000 cash for purchase of shares of treasury stock.
REQUIRED
1. Statement of Cash Flows for Queens Jewelry Products for the 2nd year ending December 31, 20xx.
2. Analyze the financial performance of Queens Jewelry Products based on ALL the financial statements (using ratios and cash flows.)
3. Explain to Michael Tightwad the financial situation to help justify the loan request? (Not just yes or no question, please use ratios and cash flows)
4. If you were Michael Tightwad, would you approve the loan for Queens Jewelry? Why or why not? (Not just yes or no question, please use ratios and cash flows)
Queens Jewelry Products info for the last two years Balance sheets
Balance Sheet Year 2 Year 1
Assets
Current Assets
Cash Year 2 $22,000 Year 1 $42,000
Accounts receivable Year 2 $90,000 Year 1 $73,000
Inventory Year 2 $143,000 Year 1 $145,000
Long term assets
Plant Assets Year 2 $507,000 Year 1 $252,000
Accumulated Dep. Plant assets Year 2 (47,000) Year 1 (42,000)
Total Assets Year 2 $715,000 Year 1 $470,000
Liabilities
Current Liabilities
Accounts Payable Year 2 $90,000 Year 1 $50,000
Accrued Liabilities Year 2 $5,000 Year 1 $10,000
Long-term liabilities
Notes Payable Year 2 $160,000 Year 1 $80,000
Total Liabilities Year 2 $255,000 Year 1 $140,000
Stockholders' Equity
Common Stock no par Year 2 $370,000 Year 1 $250,000
Retained Earnings Year 2 $110,000 Year 1 $80,000
Treasury Stock Year 2 (20,000) Year 1 0
Total Stockholders' Equity Year 2 $460,000 Year 1 $330,000
Total Liab. And Stockholders Equity Year 2 $715,000 Year 1 $470,000
Queen Jewelry Products Income Statement last year
Income Statement Year 2
Sales Revenue $ 286,000
Costs of Goods Sold $156,000
Gross Profit $130,000
Operating Expenses
Salaries and Wages Expense $56,000
Depreciation Expense-Plant Assets $20,000
Advertising Expense $16,000
Total Operating Expenses $92,000
Operating Income $38,000
Other Revenue and Expenses
Interest Revenue $12,000
Dividend Revenue $9,000
Gain on Sale of Plant Assets $10,000
Interest expense (15,000)
Total other Rev and Exp. $16,000
Net Income Before Taxes $54,000
Income Tax Expense $14,000
Net Income $40,000
Auditing and Assurance services an integrated approach
ISBN: 978-0133125689
15th edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley