Question

Suppose in the month of June your bank granted a business a $5,000 loan with principal plus interest (calculated at 12% per year) due to be repaid in 6 months. The transactions that business occurred during that month of operation were as follows:
- On June 1st, signed a 2-year contract to lease a food truck for $200 per month, with the first two months paid up front.

- On June 1st, purchased a freezer for $2,400 in cash with an estimated useful life is 20 years.

- On June 4th, purchased $800 worth of inventory from their supplier, put on their account.

- On June 5th, purchased $46 worth of gasoline for their business' truck.

- On June 5th, were charged $100 for booking fees.

- On June 10th, were charged $75 for booking fees.

- On June 12th, received a $40 gift of which was spent $24 on recreation.

- On June 15, purchased $55 worth of groceries

- On June 20th, were charged $300 for booking fees.

- On June 20th, purchased $36 worth gasoline for their business' truck.

- By June 30th, the company sold 250 products at $5 each.

The company is interested in acquiring another $5000 loan to expand. Prepare a financial report, and determine from the position of your bank should you grant the additional loan, refuse but continue business with the company, or recall the first loan.

Answer 1

Income statement
Particulars	Amount
Sales	$                                    1,250.00
Gift	$                                          40.00
Total revenue	$                                    1,290.00
Expenses
Lease rentals	$                                        200.00
Depreciation freezer	$                                          10.00
COGS	$                                        800.00
Gasoline expense	$                                          82.00
Booking fees	$                                        475.00
Recreation expenses	$                                          24.00
Groceries	$                                          55.00
Interest on bank Loan	$                                          50.00
Total expenses	$                                    1,696.00
Net profit	$                                      -406.00
Cashflows
Particulars	Amount
Net profit	$                                      -406.00
Add:
Depreciation	$                                          10.00
Increase in creditors	$                                        800.00
Advance lease rentals	$                                      -200.00
Interest payable	$                                          50.00
Net cashflows	$                                        254.00

Balance Sheet
Owner's Equity & Liabilities	Amount
Owner's capital	$                                                 -
Profit & Loss	$                                      -406.00
Bank Loan	$                                    5,000.00
Interest on bank Loan	$                                          50.00
Creditors	$                                        800.00
Total Equity & Liabilities	$                                    5,444.00
Assets	Amount
Prepaid lease rent	$                                        200.00
Freezer Less: Depreciation	$                                    2,390.00
Cash and cash equivalents	$                                    2,854.00
Total assets	$                                    5,444.00

As we can see company has made loss for the first month and also has just a nominal positive cash flow that too is because it has not paid its creditors so advancing additional Loan is out of question.

Although bank can also see for one more month and then if loss still continues bank should recall even first loan given

So for now decision is

Continue with Loan already given and if next month same loss is incurred bank should recall its Loan given.

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