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Analyze financial statements to measure the financial performance of a business
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Analyze financial statements to measure the financial performance of a business entity. PC-1.2: Contribute to team goals and objectives through active participation and collaboration. GEL-1.02: Demonstrate college-level communication through the composition of original materials in Standard English. There are three parts to this assessment. All parts should be submitted to the Competency Assessment Dropbox and labeled as indicated in each Part below. In this first part of the assessment, you will prepare a business letter to share your advice with a client. You will explain complex financial data and discuss the cause and effect of select accounting transactions on cash balances. In the second part of the assessment, you have the opportunity to analyze financial data and present the rationale for a loan renewal request besides getting some practice operating as you were a member of a team. Part 1: Business Letter In this part of the assessment, you will be assessed based on the following Outcome: GEL-1.02: Demonstrate college-level communication through the composition of original materials in Standard English. You will prepare a business letter to share your advice with the CFO of a company. You will explain complex financial data and discuss the cause and effect of select accounting transactions on cash balances. Read the fictional scenario and respond to the checklist items. Scenario: The chief financial officer (CFO), Karl Richland, of Semtell Company in Cincinnati, Ohio, is asking for your advice. The CFO explains sales are increasing but there is a constant matter of not having enough cash to meet payroll or pay vendors within 30 days. Checklist: Using the information contained in the company’s cash flow statement, prepare an informational business letter to the CFO to explain: 1. Why cash can go down even when sales are up. 2. How increases in accounts receivables and inventory balances affect cash flows within a company. 3. What effect increases or decreases in asset and liability accounts have on cash flow. 4. How changes in accounts payable balances impact cash flows. 5. Recommend a possible solution for the company’s shortage of working capital. 6. Your informational business letter should: o Use the accepted business letter format and example as provided above. o Utilize Standard English and use correct spelling and grammar. o Provide a clearly established and sustained viewpoint and purpose. o The writing should be well ordered, logical, and unified, as well as original and insightful. o Include at least one scholarly, high-quality, and current Purdue Global Library source and/or your textbook. 7. Your business letter must be written in a minimum of 2 pages, single-spaced, using current APA formatting. Please label your assessment as “First_Last name_MT480M1 Part1” and submit to the MT480M1 Competency Assessment Dropbox. Part 2: Memo In this assessment, you will be assessed based on the following Outcome: PC-1.2: Contribute to team goals and objectives through active participation and collaboration. The ability to interact and solve problems together, even at a distance, is a key skill in today’s global organizations. You will analyze financial data and provide a memo to your loan officer as if you were a member on a team. Instructions: Read the scenario, access the data worksheet below. Review the rubric which provides some tips on how to organize your team process. Then, as if you were a member of a team, respond to the items below. Requirements: This part of the assessment represents the primary steps of understanding the nature of cash flows in a business. Year-to-year comparative balance sheets are used in the analysis. After review and analysis of the data, you will prepare a business memo to outline the sources or uses of specific account cash flows and how these outcomes support your reasoning for approving or denying the loan. The analysis is based upon year-to-year changes of these specific balance sheet sections: Accounts Receivable, Inventory, Accounts Payable, Wages Payable, Plant Property and Equipment, and Long-term Debt. You will: ? Analyze financial data and present the rationale for what your loan committee (you as a member of a team) wants to do on the loan renewal request, and submit supporting documents. Scenario: You are required to conduct an analysis of specific financial data of Bob Smith, Inc. Bob is an existing bank customer. When the loan to Bob was originally made in 2016, the bank required Bob to increase the YE 2016 cash balance to at least $70,000 to qualify for the interest rate that the bank used for the original loan. This cash balance was required for the bank to make its target yield on the loan created. The Cash Flow Statement and Balance Sheet show an actual YE 2017 cash balance of less than $34,000. You will need to complete the 2017 Cash Flow Statement. In addition, you will also prepare the “Common Sized Financial Statements” for the 2 years shown. This information allows you to substantiate the 2018 loan denial or renewal request. You are acting as the loan committee of the bank and you will address an internal memo to the loan officer in charge of this loan facility giving the committee’s decision on whether to approve the loan as is, renew the loan with modifications, or deny the loan request. Be sure you move away from definitions to analysis. Additionally, you do not need to give definitions of balance sheet accounts. The Balance Sheets and Cash Flow Statements provided in the data worksheet below will assist you in your analysis. From these documents, and from the ones you produced, discuss the following: ? The operating cycle of the company ? The covenants within the CC&Rs that the company did not comply with. ? The Common Sized Financial Statement (CC&Rs) ? The Cash Flow Statement ? What did management do to fall short of the minimum cash requirements? ? Was the company’s failure to meet cash balance requirements a result of the company being unable to meet the requirement or because of management actions? ? What could be managements motivation for not complying with the loans CC&Rs? ? Where was the major portion of the company’s working capital used? ? What could management have done to comply with the CC&Rs they agreed to? ? Finally, what does your loan committee want to do about the renewal of this loan? In this area, you can: a. Renew the loan without changing the loan conditions. b. Renew the loan and modify the conditions to what is now required by the bank to receive loan approval. c. Decline the loan. Remember that banks approve or deny loans based on the 5 Cs of credit, which are: ? Character ? Capacity ? Capital ? Collateral ? Conditions Consider these when deliberating what to do with this loan and include an overview of this discussion in the memo to the company’s loan officer. In your memo: ? Include a strong thesis statement, introduction, and conclusion. The main points of the response should be developed and explained clearly in the memo with appropriate financial and accounting terminology. ? Support all arguments (no errors in logic) based upon the Statement of Cash Flows data. ? Exhibit strong higher-order critical thinking and include appropriate judgments, conclusions, and assessments based on the team’s analysis of the Balance Sheet and Statement of Cash Flows. ? Provide proper classifications, explanations, comparisons, and inferences based on the cash flow representations. Your submission should include recognition of accounts, and the team’s work should be reconciled back to the financial data provided. ? Prepare this part of the assessment in a memo format, in a minimum of two single-spaced pages, and using size 12-point font. Name the file as: MT480 Loan Committee Memo Team X. You must also submit the cash flow statement, and the common sized financial statement. Access the CC&Rs * *CC&Rs for Bob Smith, Inc. During the original loan, the bank included, as part of the loan documentation, a document called Covenants, Conditions & Restrictions (CC&Rs), which the company had to comply with to maintain its credit facility with the bank. The major conditions of this included: ? 1. The company will maintain at least $70,000 in their DDA (noninterest bearing ? checking) at all times as compensating balances against their loan. ? 2. The company will maintain a current ratio of at least 2:1. ? 3. The company will maintain a quick ratio of at least 1.5:1. ? 4. The company will not increase officer salaries by more than 5% while the loan is ? outstanding. ? 5. The company will not pay bonuses to officers without the bank’s explicit approval. Teams will consider compliance with the loan’s CC&Rs as part of their loan approval process. Access the data worksheet (Attached below) Checklist: ? In a Microsoft® Word® document address the following as if you were a member of a team (although you alone are responsible for the deliverables) based on the scenario provided above: -Provide the goals, resources, and timelines for the team project. -Explain the communication protocol for team members. -Explain how you resolved the problems ? Complete the memo; a minimum of 2 single-spaced pages, using 12-point font. As the loan officer, you must pass along the news in a business memo that is professional and written in an objective manner. Please use values in the memo whenever possible. ? Access the data worksheet below and complete it. ? Using analysis of the data sheet, explain in your letter why you are approving the loan as is, renewing the loan with modifications, or denying the loan request: ? Submit the three completed documents: (1) the Microsoft® Word® document explaining your team process, communication, and problem solving from bullet #1 (label as part a); (2) include the memo (label as part 2b) and (3) the data worksheet (label as part 2c) to the Dropbox labelled as “First_Last name_MT480M1 Part2” and submit to the MT480M1 Competency Assessment Dropbox.