Save More, Inc., a discount department store, has applied to its bankers for a loan. Although the company has been profitable, it is short of cash. The loan application includes the following information about current assets, current liabilities, net income, depreciation expense, and dividends for the past five years. (All numbers are rounded to the nearest thousand, with the 000s omitted.)
|
Dec. 31, |
Dec. 31, |
Dec. 31, |
Dec. 31, |
Dec. 31, |
|
|
1998 |
1999 |
2000 |
2001 |
2002 |
|
|
Cash and cash equivalents |
$ 5 |
$ 73 |
$ 10 |
$158 |
$ (189) |
|
Accounts receivable (net) |
403 |
555 |
516 |
576 |
654 |
|
Inventory |
253 |
142 |
383 |
385 |
1,022 |
|
Accounts payable |
19 |
17 |
281 |
253 |
52 |
|
Net income |
454 |
492 |
467 |
440 |
481 |
|
Depreciation expense . . |
50 |
50 |
55 |
60 |
60 |
|
Dividends paid |
177 |
197 |
208 |
211 |
211 |
ether the bank should loan money to Save More, Inc.
1.Compute the net cash flows from operations for the last four years.
2.What caused the sudden decrease in cash flows from operations?
3.What factors would you focus on and what additional information would you need before deciding whether to make the loan?