1.

Review of Income Statement of City Florist

1.1 The purpose of an Income Statement. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. An income statement is representative of trading over a particular period of time. Through a report of income and expenditure, income statements should help investors and creditors to determine the past financial performance of the enterprise, to predict future performance, and to assess the capability of generating future cash flows. However, information of an income statement has several limitations:


Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).


Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).

Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value). Wikipedia, http://en.wikipedia.org/wiki/Income_statement/ (Accessed 27 January 2012)


1.2 Review of Income Statement A) The following items seem excessive and could possibly be reduced y y y y Marketing 140,090 Telephone 17,668 Delivery 91,300 Store supplies 94,744 B) The following items represent essential expenditure y y y y y y y y Transport Rent Insurance Wages and salaries Administration Travel and entertaining Utilities Accounting and legal c) The following items engender queries for discussion with prospective borrower y Repair and maintenance y Interest on long-term loan

Table 1.1 Review of Income Statement of City Florist

A. Zielinska 2012

Concern should be expressed about all items in column A) and the creation of a strategy for reducing expenditure should be discussed with City Florist.

Regarding column C): discussion should be held with City Florists to consider whether any part of the repair and maintenance expenditure could be covered by a better insurance package. Details of the interest on the long-term loan should be obtained and considered in the light of a prospective additional interest repayment, which would be incurred if the bank endorsed the requested loan.

2 Review of Balance Sheet of City Florist

2.1 The purpose of a Balance Sheet. The balance sheet is a snapshot, taken at a single point in time, of the companys accounts covering its assets, liabilities and shareholders equity. The purpose of the balance sheet is to give users an idea of the companys financial position, along with displaying what the company owns and owes. Wikipedia, http://en.wikipedia.org/wiki/ Balance_sheet/ (Accessed 27 January 2012) 2.2 Review of Balance Sheet -

A) Items of concern

B) Satisfactory items

Debtors/trade receivables 111,391

Personal drawings

Table 2.1 Review of Balance Sheet of City Florist

A. Zielinska 2012

Current liabilities/short-term liabilities show no cause for concern but the scale of the repayment on the long-term liability needs to be considered in the light of the proposed debt increase. The debtors/trade receivables figure seems highly excessive and should be discussed with City Florist, with a view to a possibly strategy for accelerating the debtrecovery programme.

3 Review of Cash Flow Statement of City Florist

3.1 The purpose of a Cash Flow Statement. The cash flow statement is concerned with the flow of cash in and cash out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. The cash flow statement is intended to
1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances

2.

provide additional information for evaluating changes in assets, liabilities and

equity improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods
3.

indicate the amount, timing and probability of future cash flows Wikipedia, http://en.wikipedia.org/wiki/Cash_flow_statement/ (Accessed 27 January 2012)
4.

3.2 Review of Cash Flow Statement. City Florists cash flow statement reveals that the closing cash balance in 2011 is (24,286), which indicates an overdraft increase of 4,287. We can also see that City Florist borrowed 15,845, and his debtors represent another 20,657.

4. Decision

Dear Mr Martin Walton,

We have reviewed your application for a long-term loan in the amount 120,000 and, after much consideration, the bank has concluded that we are, at this time, unable to advance you the sum of money requested. We would, however, be able to advance you the smaller sum of 60,000. The reason of this decision is:
1) 2) 3)

The cash flow statement shows that cash the outflow is bigger than the inflow. A huge amount is of money owed to your company by its debtors An excessive amount of money is currently being spent on y y y

Marketing Telephone Deliveries

If you can provide a programme strategy for accelerating the recovery of the money owed by your debtors, and can substantially reduce the expenses listed above, the bank would be willing to reconsider the advancement of the initially requested 120,000.

If you have any queries about this decision, or if I may be of any help to you, please contact me on my mobile - number 07850278239 - or email me at: zdzbeleczko@wp.pl. I thank you for your inquiry and remain

Yours sincerely,

Anna Zielinska