Assume that you recently accepted a position with Stockman National Bank as an assis- tant loan officer. As one of your first duties, you have been assigned the responsibility of evaluating a loan request for $90,000 from Goldworks.com, a small proprietorship. In support of the loan application, Yolanda Tovar, owner, submitted a “Statement of Accounts” (trial balance) for the first year of operations ended March 31, 2010. Goldworks.com
Statement of Accounts March 31, 2010
Cash ...... 4,100
Billings Due from Others ...... 30,140
Supplies (chemicals, etc.) ...... 14,940
Trucks ...... 52,740
Equipment ...... 16,180
Amounts Owed to Others ...... 5,700
Investment in Business ...... 47,000
Service Revenue ...... 147,300
Wages Expense ...... 60,100
Utilities Expense ...... 14,660
Rent Expense ...... 4,800
Insurance Expense ...... 1,400
Other Expenses ...... 940 ______
200,000 200,000 ______1. Explain to Yolanda Tovar why a set of financial statements (income state- ment, statement of owner’s equity, and balance sheet) would be useful to you in evaluating the loan request.
Four basic financial statements are income statement, balance sheet, statement of owner’s equity and statement of cash flows. They all give a view of the financial position of the company. Income statement shows the difference between revenues and expenses. Any profit or loss of a particular period is shown by the income statement. The profit is then added to the statement of owner’s equity as it is the right of the owner, then finally the ending balance of capital is shown in the balance sheet. The revenues and expenses have been shown in income statement but have not been converted into cash; they are shown as receivable and payable in balance sheet. And all the revenues and expenses converted into cash are shown in the statement of cash flows. All the transactions other than revenues and expenses are shown in the balance sheet and cash flow. When assets are purchased they are shown in the balance sheet as increase in assets and decrease in cash for payment to purchase the assets. When the assets are utilized they are transferred to the income statement as an expense.
2. In discussing the “Statement of Accounts” with Yolanda Tovar, you discovered that the accounts had not been adjusted at March 31. Analyze the “Statement of Accounts” and indicate possible adjusting entries that might be necessary before an accurate set of financial statements could be prepared.
The two adjustment entries seems to be passes, one for usage of supplies and other to record depreciation of Trucks and equipment, and they are as follows:
Supplies expenses Dr. Supplies Cr.
Depreciation Expense DR. Accumulated depreciation Cr.
Other adjusting entries may be of prepaid insurance, if any or other expense payable may be passed but as the data is not given, therefore it may be assumed that all expenses have been recorded for the period.
3. Assuming that an accurate set of financial statements will be submitted by Yolanda Tovar in a few days, what other considerations or information would you require before making a decision on the loan request?
- The age of business, how old the business is running.
- Any loan already taken and what is the status of that loan.
- How much is financed by equity so the loan to value ratio may be developed.
SA 4-3 Financial statements Chapter 04.qxd 5/23/08 12:31 PM Page 198 ______Page 3 Chapter 4 Completing the Accounting Cycle 199 In groups of three or four, compare the balance sheets of two different companies, and present to the class a summary of the similarities and differences of the two compa- nies. You may obtain the balance sheets you need from one of the following sources: 1. Your school or local library. 2. The investor relations department of each company. 3. The company’s Web site on the Internet. 4. EDGAR (Electronic Data Gathering, Analysis, and Retrieval), the electronic archives of financial statements filed with the Securities and Exchange Commission. SEC documents can be retrieved using the EdgarScan™ service at To obtain annual report information, click on “Search for Company Filing,” click on “Companies & Other Filers,” type in the company name, and then click on “Find Companies.” Click on the CIK related to the company name, search for Form 10-K, and click on “Retrieve Selected Findings.” Finally, click on the “html” for the latest period and the related document. SA 4-4 Compare balance sheets
Wal-MartPeriod Ending / 31-Jan-10
Assets
Current Assets
Cash And Cash Equivalents / 7,907,000
Short Term Investments / -
Net Receivables / 4,144,000
Inventory / 33,160,000
Other Current Assets / 3,120,000
Total Current Assets / 48,331,000
Long Term Investments / -
Property Plant and Equipment / 102,307,000
Goodwill / 16,126,000
Intangible Assets / -
Accumulated Amortization / -
Other Assets / 3,942,000
Deferred Long Term Asset Charges / -
Total Assets / 170,706,000
Liabilities
Current Liabilities
Accounts Payable / 50,550,000
Short/Current Long Term Debt / 4,919,000
Other Current Liabilities / 92,000
Total Current Liabilities / 55,561,000
Long Term Debt / 36,401,000
Other Liabilities / -
Deferred Long Term Liability Charges / 5,508,000
Minority Interest / 2,180,000
Negative Goodwill / -
Total Liabilities / 99,650,000
Stockholders' Equity
Misc Stocks Options Warrants / 307,000
Redeemable Preferred Stock / -
Preferred Stock / -
Common Stock / 378,000
Retained Earnings / 66,638,000
Treasury Stock / -
Capital Surplus / 3,803,000
Other Stockholder Equity / -70,000
Total Stockholder Equity / 70,749,000
Net Tangible Assets / $54,623,000
IBM
Period Ending / 31-Dec-09
Assets
Current Assets
Cash And Cash Equivalents / 12,183,000
Short Term Investments / 1,791,000
Net Receivables / 28,523,000
Inventory / 2,494,000
Other Current Assets / 3,946,000
Total Current Assets / 48,935,000
Long Term Investments / 16,023,000
Property Plant and Equipment / 14,165,000
Goodwill / 20,190,000
Intangible Assets / 2,513,000
Accumulated Amortization / -
Other Assets / 3,001,000
Deferred Long Term Asset Charges / 4,195,000
Total Assets / 109,022,000
Liabilities
Current Liabilities
Accounts Payable / 20,990,000
Short/Current Long Term Debt / 4,168,000
Other Current Liabilities / 10,845,000
Total Current Liabilities / 36,002,000
Long Term Debt / 21,932,000
Other Liabilities / 24,772,000
Deferred Long Term Liability Charges / 3,562,000
Minority Interest / 118,000
Negative Goodwill / -
Total Liabilities / 86,385,000
Stockholders' Equity
Misc Stocks Options Warrants / -
Redeemable Preferred Stock / -
Preferred Stock / -
Common Stock / 41,810,000
Retained Earnings / 80,900,000
Treasury Stock / -81,243,000
Capital Surplus / -
Other Stockholder Equity / -18,830,000
Total Stockholder Equity / 22,637,000
Total liabilities and stockholders equity / ($66,000)
Ref:
Similarities
1Both balance sheets comprised of assets, liabilities and stock holders equity.
2Asset section of both balance sheets comprises of fixed and current assets.
3Liabilities of both comprises of long term and short term.
4The both have been made in the same pattern.
Differences:
1The current assets to total assets of Wal-Mart is 28% while of IBM it is 45%
2The current liabilities to total liabilities of Wal-Mart is 56% and of IBM is 42%
3The debt to total assets ratio of |Wal-Mart is 58% and of IBM is 79%
4The debt to equity ratio of Wal-Mart is 141% while of IBM is 382%
5Wal-Mart is less debt based company as compare to IBM.