Submitted by: Submitted by Ravneet
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Words: 522
Pages: 3
Category: Literature
Date Submitted: 12/03/2013 04:13 PM
What Are Financial Statements? A Case Study
Gail was applying for a bank loan to start her new business: Nutrimin, a retail store selling nutritional supplements, vitamins, and herbal remedies. She described her concept to Hal, a loan officer at the bank.
Hal: How much money will you need to get started?
Gail: I estimate $80,000 for the beginning inventory, plus $36,000 for store signs, shelves, fixtures, counters, and cash registers, plus $24,000 working capital to cover operating expenses for about two months. That’s a total of $140,000 for the start-up.
Hal: How are you planning to finance the investment of $140,000 for the start-up?
Gail: I can put in $100,000 from my savings, and I’d like to borrow the remaining $40,000 from the bank.
Hal: Suppose the bank lends you $40,000 on a one-year note, at 15% interest, secured by a lien on the inventory. Let’s put together projected financial statements from the figures you gave me. Your beginning balance sheet would look like what you see on the computer screen:
<develop the Balance Sheet>
Gail: Now I see why it’s called a “balance sheet.” The money invested in assets must equal the financing available—it’s like two sides of the same coin. Also, I see why the assets and liabilities are classified as “current” and “noncurrent”—the bank wants to see if the assets turning into cash in a year or less will provide enough cash to repay the one-year bank loan. Well, in a year there should be cash of $104,000.
That’s enough cash to pay off more than twice the $40,000 amount of the loan. I guess that guarantees approval of my loan!
Hal: We’re not quite there yet. We need some more information. First, tell me: How much do you expect your operating expenses will be?
Gail: For year 1, I estimate as follows:
Hal: We also have to consider depreciation on the store equipment. It probably has a useful life of 10 years. So each year it depreciates 10% of its cost of $36,000. That is $3,600 a year for depreciation....