help create a pro forma statements
help create a pro forma statements
Subject: General Questions / General General Questions
Question
JOYNER LUMBER CASE REQUIREMENTS
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1. Background Information. Based on the information provided to you in the case, write a couple of paragraphs about the company, its management and the industry identifying the main business activities, major competitors and any significant developments during this period. In another paragraph briefly describe the primary factors that affect the industry in which JLC’s sales are concentrated. For this last part, you can use some of the industry publications that are listed in chapter 5 of your textbook.
2. Spread the four full years of financial statements and the interim report. This means that you need to transfer the financial data given to you in the case to the Excel “Spreadsheet Joyner Lumber Case” that is been provided to you.
The spreads include the common-size income statement, the common-size balance sheet and the ratio worksheet. As the interim report covers only four months, any ratio calculations that utilize income statement information will need to be adjusted. For example, to calculate return on assets you need to “annualize” net income i.e. multiply the four-month net income by three to have an annual figure. The balance sheet data do not need any adjustments. A couple of things that you need to take into account when transferring the data:
a. Notes payable to banks and others represent mortgage notes payable which call for $10,000 of principal payments annually. Therefore, this amount should be shown as current maturities and the remaining balance as long term debt.
b. Included in general and administrative expenses are depreciation & amortization expenses of:
1987 – 72,131
1988 – 64,220
1989 – 64,867
1990 – 82,811
YTD 91 – 29,058
Take these amounts out of general and administrative expenses and show them in the depreciation & amortization line.
c. Other income, net is composed of:
1987
1988
1989
1990
4/30/1991
Gain on Sale of
Assets
–
101,238
–
238,645
–
Interest Expense
4,055
4,039
3,127
5,644
2,413
Other Income
35,895
28,649
57,293
94,070
57,705
Total Other Income,
Net
31,840
125,848
54,166
327,071
55,292
Input these amounts separately in the “IS” tab in the three associated lines, Specifically:
Interest Expense Other Income
Gain on Sale of Assets
3. Review the historical financial performance of the firm. In one page, discuss the company’s profitability, liquidity and leverage positions. Using the ratios that you calculated and the associated RMA industry statistics, identify the areas that show improvement and the areas of potential concern.
4. Develop pro forma statements for 1991 based on the “JLC Assumptions” document which has been provided.
5. Identify the company’s strengths and weaknesses.
6. Summary/Recommendations. Based on the above analysis, summarize your findings and describe your recommendations for improvement.
7. Is this Company creditworthy to justify extending a bank loan? For this purpose, assume that you have a request for a $200,000 line of credit. To answer this question, consider the various critical factors which are known as the Cs of Credit, specifically:
a. Character – this factor refers to the borrower’s honesty and trustworthiness. What is the assessment of the borrower’s integrity and intent to repay? Are there any serious doubts?
b. Capacity – it involves both the borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Does the company have identifiable cash flow or alternative sources of cash to repay debt?
c. Capital – it refers to the borrower’s wealth position measured by financial soundness and market standing. Can the firm or individual withstand any deterioration in its financial position?
d. Collateral – This is the lender’s secondary source of repayment or security in the case of default. Does the borrower possess assets of sufficient quality and value to provide adequate support for a loan?
e. Conditions – This term refers to the economic environment or industry – specific supply, production, and distribution factors influencing a firm’s operations. Does the outlook for the economy and industry where a borrower is situated add strength to a loan?
8. Search some financial resources such as American Banker, The RMA Journal, The Wall Street Journal, etc, and try to locate a recent article (past six months) that can provide useful information about lending activities in today’s environment that perhaps might have affected your previous loan analysis. As the article will be assessed for relevance, try to find articles that discuss loans to specific industries, loans that have gone bad or articles that you can use as lessons learned.
Provide a brief summary of the article and a link or full copy. An example of an article summary follows below:
CREDIT RISK MANAGEMENT: Lessons for Success
Wesley, David H . The RMA Journal 95. 3 (Nov 2012): 48-53,11.
SUMMARY: Benjamin Franklin once observed, "An ounce of prevention is worth a pound of cure." And so it is with credit risk management. Both borrowers and bankers have been affected by the changing regulatory environment, the economy, and credit difficulties, and the pace of change seems to be accelerating. Given the credit cycles over the past 30 years and the resulting aftermath in the financial and credit markets, the author is confident that the days of booms and busts in the financial industry have not been repealed and will continue. He is equally confident that credit cycles will continue to turn on you at the most inopportune times, especially for those financial institutions lacking a well-developed and balanced risk taking culture.
Let me know if you have any questions.
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Forecast Assumptions
Mr. Joyner feels that the company will continue to grow in the foreseeable future. In order to produce projected statements for 1991, he has provided some support showing that you should use the following assumptions:
1. Net Sales and cost of sales will increase by 20% in 1991 from the 1990 levels. All other expenses and other income will continue to grow proportionately to the first four months for the remaining eight months of the year.
2. Cash will represent the same percent of sales as at 4/30/1991.
3. The Accounts Receivable (Days) ratio will remain the same as in 1990.
4. The Inventory Turnover vs. COGS (x) ratio will remain the same as in 1990.
5. For net fixed assets use the formula: Beginning Net Fixed Assets – Sales
of Fixed Assets + Purchases of Fixed Assets – Depreciation Expense for the Year = Ending Net Fixed Assets. There are no sales/purchases of fixed assets in the remaining months of 1991.
6. The rest of the assets will maintain the same relationship with sales as in 1990.
7. The Accounts Payable vs. COGS (Days) ratio will remain the same as in 1990.
8. Accrued expenses will maintain the same relationship with sales as in 1990.
9. Other current liabilities will remain the same as at 4/30/91.
10. The lines long-term debt and current maturities of long term debt should be used for the “notes payable to banks and others” liability. Here, the forecasted amounts remain unchanged from 4/30/91.
11. All the equity accounts with the exception of retained earnings will remain unchanged from 4/30/91.
12. The line “Notes payable – banks” should be used to balance the accounting equation. In other words, leave the amount owed under this line as the last item to forecast; once you figure out the forecasted income statement and all other accounts in the balance sheet, you will most likely have total assets exceeding total liabilities and equity (TA>TL+TE) at year end. The difference will be the amount that you need to borrow if you do not make any other adjustments on the asset or equity sides.
