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I need help with this case analysis. I wanted to view the document on CourseHero to help me as I work through these problems, but I do not want to pay $40 just to help me with one homework assignment. Is there a way to unlock this document for like $5-10?
Ed Hernandez worked in auto parts stores for most of his life.He began working as a stock clerk in a neighborhood store when he was still in high school, and after graduating from college, he accepted a management position with a national chain of auto parts stores.After working with the large corporation for more than 10 years, he decided to open his own business to serve both the auto repair shops and the general public.The business opened on New Year's Day, 2019.Because of his experience in the industry, he was well known by many of the owners of auto repair shops and residents of his community, and they were happy to hear that he was opening his own store.In the first year of business (2019), the company grossed $290,000 and had an operating profit before tax of $8,000.
Although the customers from the general public paid with cash or credit card, Ed offered the auto repair shops 30 days' credit.This was necessary in order to be competitive with other parts stores in the area.The increasing level of accounts receivable, though, placed a great strain on the company cash flow and, because of the lack of cash, Ed found it difficult to replace the inventory as quickly as it was sold.When the business first opened, the inventory level was $65,000 and accounts receivable were zero; however, by the end of the first year, accounts receivable were $25,000 and the inventory had dropped to $50,000.Ed's Auto Parts did not have a problem with bad debts; in fact, almost all customers paid within 30 days and only a few took 45 to 60 days to pay.However, the normal 30-day credit was enough of a delay to cause cash problems.
Ed was concerned that the drop in inventory could result in lost sales if the customers could not get the parts they needed.He might also start to lose the repair shops as customers if inventory shortages occurred frequently.Ed therefore decided to ask his bank for a loan of $25,000.He planned to use $15,000 to restock inventory to its original level; the remaining $10,000 would be used for working capital.Ed was willing to pledge his home as collateral if necessary; it had a market value of $100,000 and he still owed $40,000 on his mortgage.His personal credit record and that of the business were excellent.Since the economy was strong, Ed felt confident that sales would continue to increase in the coming years.
He took the financial statements shown on the next page to his banker to ask for the loan.
Ed's Auto Parts Inc.
Income Statement 1/1/19 to 12/31/19
Sales
$290,000
Cost of goods sold
170,000
Gross profit (margin)
$120,000
Expenses
Employee Wages
$50,000
Owner salary
20,000
Rent
15,000
Employee taxes
8,000
Advertising
5,000
Insurance
4,000
Utilities
6,000
Office supplies
1,000
Accounting/legal
3,000
Total expenses
$112,000
Operating profit
before tax
$8,000
Ed's Auto Parts, Inc.
Balance Sheet12/31/19
Current Assets
Current Liabilities
Cash
5,000
Accounts receivable
25,000
Accounts payable
$25,000
Inventory
50,000
Current portion of
Supplies
2,000
long-term debt
8,000
Prepaid expenses
3,000
Accrued expenses
2,000
Total current assets
$85,000
Total current liabilities
$35,000
Fixed Assets
Long-Term Liabilities
Fixtures
$20,000
Equipment
15,000
Note Payable
$80,000
Leasehold Imp.
25,000
Less: current
(8,000)
Total fixed assets
$60,000
Total long-term liabilities
$72,000
Total liabilities
$107,000
Total Assets
$145,000
Equity
$38,000
Total liabilities & equity
$145,000
Ed's Auto Parts Case Questions
- Does Ed have a cash flow problem?Why or why not?
- Ed sees the bank loan as a way to deal with his current problems.What else could Ed do to try to deal with his issues with growing accounts receivables and not having the funds to re-stock inventory?
- Consider Ed's request for $25,000.Is this enough?
- If you were Ed's banker, what other information would be helpful in determining the appropriate amount of working capital, and the overall financial health of the auto parts store?
- Does the cash flow indicate that Ed is a poor manager?
- What is the breakeven sales point for Ed's Auto Parts?Show your work.
- If you were the banker, would you make this loan?Why or why not?
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