90.2K

Verified Solution

Link Copied!

It is January of $2018$ and you are now a loan officer at First Bank. Among your first assignments is to decide on the merits of making a four year $$40,000$ loan to a local merchant, Howard's Apparel The company deals in upscale fashions for women.

The proprietors are Marcia and John Howard, who began the business in January of $2016.$ Generally, Marcia is responsible for managing the retail operations, while John keeps the books.

The business has been successful beyond the wildest dreams of the owners, so much so that in two short years, the Howards have already embarked on expansion. At the end of $2017,$ they signed a lease on a second store and invested significantly in new fixtures. Now, they need to borrow $$40,000$ for, among other things, inventory for the new location. Approximately half of the loan will be used for this purpose, with the remainder to provide operating funds.

The Howards have a good reputation in the community and have established a steady customer base for their goods. There is every reason to expect that a second location will do equally well as the first.

If there has been a problem over the past two years, it has been an excessive work load in the administrative area. Since John Howard remains employed at the courier company, he has only a modest amount of time to devote to accounting and other administrative functions. After struggling for a year with this dilemma, the Howards hired an accounting clerk to assist John. This has provided the required manpower, but at a significant increase in administrative costs.

It is up to you to decide whether the Howards should receive the loan. Please prepare a report on the subject, backing up your conclusions with appropriate references to financial ratios. The company$$s financial statements appear below.

HOWARDS APPAREL $-$ COMPARATIVE BALANCE SHEET

$20172016$

Current Assets

Cash $738021645$

Accounts Receivable $2952028260$

Inventory $2070018900$

Prepaid Expenses $141902070$

Total $7179070875$

Fixed Assets

Fixtures $($net$)118268103123$

Total Assets $190058173998$

Liabilities

Current Liabilities

Notes Payable $35000$

Accounts Payable $2850019090$

Other Payables $36002550$

Total $3560021640$

Owners Equity

Capital $154458152358$

Total Liabilities and Equity $190058173998$

HOWARDS APPAREL $-$ COMPARATIVE INCOME STATEMENT

$20172016$

Revenue

Net Sales $285900231300$

Cost of Goods Sold

Inventory Jan. $11890018000$

Purchases $138629120500$

Total $157529138500$

Less Inventory Dec $312070018900$

Cost of Goods Sold $136829119600$

Gross Profit on Sales $149071111700$

Selling Expense $4738939060$

Admin Expense $6529237890$

Total $11268176950$

NET INCOME $3639034750$

Answer & Explanation Solved by verified expert

See Answer