The Portable MBA in Finance and Accounting, 4th Edition

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Understanding Financial Statements

Les Livingstone

What Are Financial Statements? A Case Study

Gail was applying for a bank loan to start her new business: Nutrimin, a retail store selling nutritional supplements, vitamins, and herbal remedies. She described her concept to Hal, a loan officer at the bank.

Hal: How much money will you need to get started?

Gail: I estimate $80,000 for the beginning inventory, plus $36,000 for store signs, shelves, fixtures, counters, and cash registers, plus $24,000 working capital to cover operating expenses for about two months. That’s a total of $140,000 for the start-up.

Hal: How are you planning to finance the investment of $140,000 for the start-up?

Gail: I can put in $100,000 from my savings, and I’d like to borrow the remaining $40,000 from the bank.

Hal: Suppose the bank lends you $40,000 on a one-year note, at 15% interest, secured by a lien on the inventory. Let’s put together projected financial statements from the figures you gave me. Your beginning balance sheet would look like what you see on the computer screen:

Nutrimin

The left side shows Nutrimin’s investment in assets. It classifies the assets into “current” (which means turning into cash in a year or less) and “noncurrent” (not turning into cash within a year). The right side shows how the assets are to be financed: partly by the bank loan and partly by your equity as the ...