You are working as a loan officer at a local bank. Earlier today, a former high-school...

You are working as a loan officer at a local bank. Earlier today, a former high-school classmate came in to see you about a loan for the family’s retail business. After looking over the store’s financial statements, you notice that the store is posting a strong net income growth. However, these statements also reveal that the store has had a negative cash flow for the last two years and that account receivables have almost doubled over the same time span. Should this concern you? Why?

Solutions

Expert Solution

Yes, this should concern me. A business no matter how beneficial it is or in a huge profit, it might be running can't function without cash. If the cash flow is negative that means the business has no cash in hand to fulfill its current liabilities. This will force the business to borrow and the repayment amount with interest will increase the operating cost and reduce profit.

Moreover, the amount which the company is going to receive from the sources in the future can turn into bad debts and this will further eat into the profit. A company needs cash for buying raw material, paying wages and almost everything in the business. If the cash is low the company will soon run into huge debts to carry on these day to day functions and will not be profitable anymore.

While giving a loan to the company the bank has to look for the liquidity the company has in hand to fulfill its current liabilities as well as assets and future prospects for servicing long-term debts.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

You are the loan officer at the local bank. A customer in good standing seeks to...

You are the loan officer at the local bank. A customer in good standing seeks to borrow money to start a business. The customer informs you that they will be able to repay the bank a lump sum of $45,000 in 3 years. What is the most you would be willing to lend this customer if the required interest rate is 15%? Assume interest compounds annually.

Assume that you are a Loan Officer at the local bank. Company A wants to get...

Assume that you are a Loan Officer at the local bank. Company A wants to get a long-term loan from your bank. Company B wants to get a long-term loan from your bank. Company C also wants to get a long-term loan from your bank. The TOTAL DEBT RATIO for Company A is .70 and the TIMES INTEREST EARNED RATIO for Company A is .70 for the year. The TOTAL DEBT RATIO for Company B is .75 and the TIMES...

You work as a commercial loan officer in a local bank. The president of a small-to-medium...

You work as a commercial loan officer in a local bank. The president of a small-to-medium sized fast-food restaurant chain, with 250 employees in five locations, comes into your bank and asks for a business loan of $400,000 to help fund his expansion plans for building two additional restaurant locations. Question(s): What would be your concerns as the loan officer? What questions would you ask and what financial documents might you request of him/her? Chapter 3 discusses differences between Accrual...

You work as a commercial loan officer in a local bank. The president of a small-to-medium sized...

You work as a commercial loan officer in a local bank. The president of a small-to-medium sized fast-food restaurant chain, with 250 employees in five locations, comes into your bank and asks for a business loan of $400,000 to help fund his expansion plans for building two additional restaurant locations Question(s): What would be your concerns as the loan officer? What questions would you ask and what financial documents might you request of him/her? Discusses differences between Accrual basis and Cash...

You are a loan officer for National Bank. You have a loan application submitted by a...

You are a loan officer for National Bank. You have a loan application submitted by a company for $50,000. This company just got a prior loan for $45,000 and has not made the first payment. This gives you an uneasy feeling as you examine a loan application from ABC, Co. The application included the following financial statements. ABC, Co. Income Statement For the Year Ended December 31, 2018 Sales revenue $100,000 Cost of goods sold (50,000) Depreciation expense ...

Assume that you are a commercial loan officer for a bank and are preparing to meet...

Assume that you are a commercial loan officer for a bank and are preparing to meet with a corporate client. The client has approached you seeking an increase in the loan it has with the bank. Prepare a list of things that you would want to know about the company’s operations before you decide whether to approve the increase in the loan.

Assume that you are a commercial loan officer for a bank and are preparing to meet...

4) If you were the bank loan officer would you recommend renewing the loan or demand...

4) If you were the bank loan officer would you recommend renewing the loan or demand its repayment? Would your actions be influenced if, in early Year 2, Computron (the company) showed you its projection plus proof that it was going to raise over $1.2 million of new equity capital? PS: Year 2 data is estimation. Year 2 Year 1 Year 0 Industry Current Ratio 1,86x 1,1x 2,3x 2,7x Quick Ratio 0,67x 0,4x 0,8x 1,0x Inventory turnover 4,10x 4,5x 4,8x...

Question C4 In a local bank, there was a very high employee turnover among the Loan...

Question C4 In a local bank, there was a very high employee turnover among the Loan Officers in the past year. Loan Officers are responsible to promote the banking services and check the credibility of various firms before lending money to them. Many new Loan Officers, after joining the bank, resigned within six months. Joe assumed as the new manager to the department in the local bank. He found that most employees were dissatisfied with the company. Their salary levels...

You are a loan officer for First Benevolent Bank. You have an uneasy feeling as you...

You are a loan officer for First Benevolent Bank. You have an uneasy feeling as you examine a loan application from Daring Corporation. The application included the following financial statements. DARING CORPORATION Income Statement For the Year Ended December 31, 2018 Sales revenue $100,000 Cost of goods sold (50,000) Depreciation expense (5,000) Remaining expenses (25,000) Net income $ 20,000 DARING CORPORATION Balance Sheet December 31, 2018 Cash $ 5,000 Accounts receivable 25,000 Inventory 20,000 Operational assets 55,000 Accumulated depreciation...

Subjects