- Prepare an income statement in a proper format
| Halloween Costume and Supplies Shop | |||
| Income Statement | |||
| As of September 30, 2019 | |||
| Sales revenues | $1,134,567 | ||
| Cost of Goods Sold | $740,740 | ||
| Gross profit | $393,827 | ||
| Operating Expenses | |||
| Salaries expense | $182,616 | ||
| Depreciation expense | $69,322 | ||
| Office expenses | $63,542 | ||
| Selling expense | $61,728 | ||
| Total expenses | $377,208 | ||
| Income before income taxes | $16,619 | ||
| Income taxes Expanse 20% | $3,323.80 | ||
| Net income | $13,295.20 | ||
- Is this a high or low-risk loan?
It is a low-risk loan;
From the income statement, the shop reports a net profit of $ 13,295.20. From the Halloween costume and suppliers’ shop income statement, it shows the shop is profitable. Profitability is a good indicator that the shop can pay expenses and liabilities and even retain some income for the shop.
- Provide financial analysis on the balance sheet (ratios)
Ratio analysis helps in the assessment of the shops’ financial performance that is the financial condition of the shop.
They include:
- The current ratio measures whether the company has sufficient current assets to pay its current liabilities and obligations.
- Debt to equity ratio, which measures the total amount of money the shop owe to others to the total money invested.
Current ratio = current assets / current liabilities
Current ratio = $418,988 / 336560
=1.245
Debt to equity ratio = Total liabilities / Equity
Debt to equity ratio = (336,560 + 184,000) / 234,428
= 2.22
- Discuss any non-financial factors you may think are important
Non-financial factors are the factors that affect financial commitments and are always considered before the decision is made. I would find the relationship of Halloween costume and supplies shop with its suppliers and the shop’s customers that is the shop able to pay the suppliers within the agreed time. Staff motivation and morale is the non-financial factor I could consider as highly motivated employees are vital to the profitability of the shop. Existence of any pending legal litigation, against the shop, if available, what will its implication on the shop’s operations and its financials.
- Recommend whether to provide the loan and why.
I would recommend that the bank approve the financing of Halloween costume and suppliers shop due to:
- From the income statement, the shop reports net profit of $13,295.20, which is a good indicator that the shop is profitable if the shops continue this way it will be able to pay back the loan.
- From the current ratio, that measures the company’s total current assets, that are used to pay their current liabilities and obligations. The shop’s current ratio is 1.245, although the standard and the most preferred ratio is 1.5 to 2. The shops 1.245 do not deviate so much, and from the balance sheet, the shop has quite the right store furnishing amount, which could be the reason for the low ratio.
- From the debt to equity ratio, which measures the total amount of money the shop owes from others to the total capital invested, the obligation to equity ratio is 2.22. The most preferred ratios are between 1.0 to 3.0. The ratio of 2.22 is within the required ratios; hence I recommend for the financing.