You are a loan officer when an owner of a stero components store applies for a business loan from your bank. Your analysis of the store's financial statements reveals a history increase in revenues and profits for the current year. Further analysis shows nearly of this increase is due to a promotional electioneer where consumers bought in a minute and pay nought until January 1 of next year. The store record all of these sale as accrued revenue. Do you see any concerns surrounded by approving a loan to this store?
Answers: Well, they did have the sale revenue. They also have the Accounts Receivable. My biggest concern would be the expected change flow this year and next year, especially from the financing they give the customer.
I would check what the allowance for doubtful accounts is for those sales, and quiz them on how they arrived at that estimate. If it's base on some sort of industry standard, then it should be OK.
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Answers: Well, they did have the sale revenue. They also have the Accounts Receivable. My biggest concern would be the expected change flow this year and next year, especially from the financing they give the customer.
I would check what the allowance for doubtful accounts is for those sales, and quiz them on how they arrived at that estimate. If it's base on some sort of industry standard, then it should be OK.
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