Bank Management, 6th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2006 by South-Western, a division of Thomson Learning

 Type I Error
 Making a loan to a customer who will ultimately default
 Type II Error
 Denying a loan to a customer who would ultimately repay the debt.

1.
2.
3.
4.
5.
What is the character of the borrower and the quality of information provided?
What are the loan proceeds going to be used for?
How much does the customer need to borrow?
What is the primary source of repayment and when?
What collateral is available ?
(Secondary source of repayment)

2.
3.
4.
1.
Overview of management and operations
Spread the financial statements
Cash flow analysis
Pro forma projections and analysis

 Gather information on:
 Business and related industry
 Management quality
 Nature of loan request
 Quality of the data

 Spread the financials and compute common size ratios
 Compare with industry averages
 Compare over time (on trend)
 Calculate a series of financial ratios that indicate performance and risk
 Compare with industry averages
 Compare over time

Exhibit 16.3 Wades Office Furniture - Income Statement
Wades Office Furniture
Unaudited: , SIC #2522
INCOME STATEMENT
Net sales
Cost of goods sold
Gross profit
[- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002 % of 2003 % of 2004 % of
RMA
6/30/03 -
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total 3/31/04
#N/A 7,571 100.0% 8.10% 8,184 100.0% 51.88% 12,430 100.0% 100.0%
#N/A 5,089 67.2% 6.58% 5,424 66.3% 52.19% 8,255 66.4%
#N/A 2,482 32.8% 11.20% 2,760 33.7% 51.27% 4,175 33.6%
67.3%
32.7%
Selling expenses
Management salaries
#N/A
#N/A
906 12.0% 13.25% 1,026 12.5% 58.67% 1,628 13.1%
0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
General & administrative expenses #N/A 1,019 13.5% 18.84% 1,211 14.8% 39.47% 1,689 13.6%
Research and development expenses #N/A 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
Depreciation & amortization
Other operating expenses
Total operating expenses
#N/A
#N/A
70
0
0.9%
0.0%
1.43%
0.00%
71
0
0.9%
0.0%
2.82%
0.00%
73
0
0.6%
0.0%
#N/A 1,995 26.4% 15.69% 2,308 28.2% 46.88% 3,390 27.3%
Operating profit #N/A 487 6.4% -7.19% 452 5.5% 73.67% 785 6.3%
25.7%
7.0%
Interest on marketable securities
Income on long term investments
Interest expense - Bank Notes
Interest expense - Term notes + LTD
All other expenses
All other income
Total All Other Income (Expenses)
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
Profit before taxes #N/A
Income taxes #N/A
Extraordinary and other income (exp.) #N/A
Net income #N/A
Dividends
Retained earnings
#N/A
#N/A
141
0
0
0
0.0% 0.00%
0.0% 0.00%
1.9% -15.60%
0.0% 0.00%
119
0
0
0
0.0% 0.00%
0.0% 0.00%
1.5% 31.93%
0.0% 0.00%
157
0
0
0
0.0%
0.0%
1.3%
0.0%
63
0
0.8%
0.0%
36.51%
0.00%
86
0
1.1%
0.0%
17.44%
0.00%
101
0
0.8%
0.0%
(204) -2.7% 0.49% (205) -2.5% 25.85% (258) -2.1%
283 3.7% -12.72%
100
0
183
1.3% -5.00%
0.0% 0.00%
2.4% -16.9%
247
95
0
152
3.0%
1.2%
113.36%
97.89%
0.0% 0.00%
1.9% 123.0%
527
188
0
339
4.2%
1.5%
0.0%
2.7%
0
183
0.0% 0.00%
2.4% -16.94%
0
152
0.0% 0.00%
1.9% 123.03%
0
339
0.0%
2.7%
6.2%

Wades Office Furniture: Historical Balance Sheet (Assets)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
ASSETS
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Deferred tax asset
Other current assets
Current assets
Gross fixed assets
Leasehold improvements
Less accumulated dep.
Net fixed assets
Notes & contracts receivable
Long-term investments
Intangible assets
Other noncurrent assets
Total Assets
[- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002 % of 2003 % of 2004 % of
RMA
6/30/03 -
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total 3/31/04
#N/A
#N/A
141
0
4.3% -5.67% 133
0.0% 0.00% 0
3.9% -45.86%
0.0% 0.00%
72
0
1.6%
0.0%
#N/A 1,254 38.4% 11.56% 1,399 40.8% 35.53% 1,896 42.3%
#N/A 1,160 35.6% 3.88% 1,205 35.2% 46.39% 1,764 39.4%
#N/A
#N/A
47
0
1.4% 6.38%
0.0% 0.00%
50
0
1.5% -70.00%
0.0% 0.00%
15
0
0.3%
0.0%
#N/A 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
#N/A 2,602 79.7% 7.11% 2,787 81.4% 34.45% 3,747 83.6%
#N/A
#N/A
#N/A
#N/A
629 19.3% 7.15% 674 19.7% 17.36% 791 17.7%
198 6.1% 2.02% 202 5.9% 17.82% 238 5.3%
206 6.3% 34.47% 277 8.1% 24.91% 346 7.7%
621 19.0% -3.54% 599 17.5% 14.02% 683 15.2%
5.5%
28.8%
29.7%
2.4%
66.4%
28.2%
#N/A
#N/A
#N/A
0
0
40
0.0% 0.00%
0.0% 0.00%
1.2% -2.50%
0
0
39
0.0% 0.00%
0.0% 0.00%
1.1% 28.21%
0
0
50
0.0%
0.0%
1.1% 0.4%
#N/A 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0% 5.0%
#N/A 3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0% 100.0%

Wades Office Furniture: Historical Balance Sheet (Liabilities and Equity)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
LIABILITIES & EQUITY
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002 % of 2003 % of
[- H I S T O R I C A L -]
2004 % of
RMA
6/30/03 -
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total 3/31/04
Notes payable - bank
Accounts payable
Accrued expenses
Income tax payable
#N/A
#N/A
#N/A
#N/A
643 19.7% -9.49%
836 25.6% 8.61%
205
41
6.3%
1.3%
25.85%
51.22%
582 17.0% 53.26% 892 19.9%
908 26.5% 41.19% 1,282 28.6%
258
62
7.5%
1.8%
34.88%
27.42%
348
79
7.8%
1.8%
Current maturity - Term notes #N/A
Current maturity - LTD #N/A
Other current liabilities
Current liabilities
#N/A
0
75
0
0.0%
2.3%
0.00%
0.00%
0.0% 0.00%
0
75
0
0.0%
2.2%
0.00%
0.00%
0.0% 0.00%
0
75
0
0.0%
1.7%
0.0%
#N/A 1,800 55.2% 4.72% 1,885 55.0% 41.96% 2,676 59.7%
Deferred tax liability
Term notes
Long-term debt (LTD)
Other noncurrent liabilities
Total liabilities
#N/A
#N/A
#N/A
#N/A
0
0
450
0
0.0%
0.0%
0.00%
0.00%
13.8% -16.67%
0.0% 0.00%
0
0
375
0
0.0%
0.0%
10.9% -20.00%
0.0%
0.00%
0.00%
0.00%
0
0
300
0
0.0%
0.0%
6.7%
0.0%
#N/A 2,250 69.0% 0.44% 2,260 66.0% 31.68% 2,976 66.4%
6.0%
14.0%
1.7%
3.6%
11.8%
37.1%
20.1%
0.9%
58.1%
Common stock - par
Paid-in surplus
Preferred stock
#N/A
#N/A
#N/A
600 18.4% 0.00%
100 3.1% 0.00%
0 0.0% 0.00%
600 17.5% 0.00%
100 2.9% 0.00%
0 0.0% 0.00%
600 13.4%
100 2.2%
0 0.0%
Treasury and other equities
Retained earnings
#N/A
#N/A
0
313
0.0%
9.6%
0.00%
48.56%
0
465
0.0%
13.6%
0.00%
72.90%
0
804
0.0%
17.9%
Stockholder's equity #N/A 1,013 31.0% 15.00% 1,165 34.0% 29.10% 1,504 33.6% 41.9%
Total Liabilities and Equity#N/A 3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0% 100.0%

 Liquidity and activity ratios
 Leverage ratios
 Profitability ratios

 Net Working Capital = CA - CL
 Current Ratio = CA / CL
 Quick Ratio = (Cash + A/R) / CL
 Days Cash = Cash / Avg. daily sales
 Inventory Turnover = COGS / Avg. Inv.
 AR Collection (Days A/R) = (A/R) / Avg. daily sales
 Days Cash to Cash
= Days Cash + Days A/R + Days inventory
 Days Payable Outstanding =AP / Avg. daily pur.
= AP / [(COGS +
D
Inventory) / 365]
 Sales to net fixed assets = Sales / Net fixed assets

Wades Office Furniture: Liquidity Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
Credit sales
Liquidity Ratios
Current Ratio
Quick Ratio
Days Cash
Days Accts Receivable (Turnover)
Days Inventory (Turnover)
Cash-to-cash asset cycle
Days AP Outstanding (Turnover)
Memo: COGS / Accounts payable
Days Cash to Cash Cycle
Est. W.C. financing Needs
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002
$ 1,000
2003
$ 1,000
$ 7,571 $ 8,184
1.45
0.78
Days Times
6.80 53.70 x
60.46
6.04 x
83.20
4.39 x
150.45
48.83
7.47 x
59.96
6.09 x
101.62
3.59 x
$1,417
1.48
0.81
Days Times
5.93 61.53 x
62.39
5.85 x
81.09
4.50 x
149.41
60.60
6.02 x
61.10
5.97 x
88.81
4.11 x
$1,320
[- H I S T O R I C A L -]
2004
$ 1,000
$ 12,430
RMA
6/30/03 -
3/31/04
1.40
0.74
1.70
0.90
Days Times Days Times
2.11
172.64 x
55.67
78.00
135.79
6.56 x 45.0
4.68 x 65.0
8.1x
5.6x
53.09
56.68
6.88 x 32.0
6.44 x
11.3x
11.3x
82.70
$1,870
4.41 x

 Debt Ratio = Debt / Total assets
 Debt to tangible net worth = Debt / Tang. NW
 Times interest earned = EBIT / Int. exp.
where,
EBIT = Earns before tax plus int. exp.
 Fixed Charge Coverage
= (EBIT+lease pay) / (Int. exp.+ lease pay)
 Net Fixed Assets to Tangible NW
 Dividend Payout %
= Dividends paid / Net profit

Wades Office Furniture: Leverage Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002
$ 1,000
2003
$ 1,000
Leverage Ratios
Debt to Tangible Net Worth
Times Interest Earned
2.31 x
3.01 x
Fixed Charge Coverage 1.96 x
Net Fixed Assets to Tangible Net Worth 63.82%
Dividend Payout 0.00%
2.01 x
3.08 x
1.79 x
53.20%
0.00%
[- H I S T O R I C A L -]
2004
$ 1,000
2.05 x
4.36 x
2.09 x
46.97%
0.00%
RMA
6/30/03 -
3/31/04
1.7x
5.3x
1.7x
50.0%

 Return on Equity (ROE)
= Net income / Total equity
 Profit before taxes to net worth
= Profit before taxes / Tangible net worth
 Return on Assets (ROA) = Net income / Total assets
 Profit before taxes to total assets
= Profit before taxes / Total assets
 Asset utilization (AU)= Sales / Total assets sometimes referred to as asset turnover


Profit margin (PM) = Net income / Sales
Sales growth =
D
Sales / Last period’s sales
 Income taxes to profit before taxes
= Reported income tax / Profit before taxes

Wades Office Furniture: Profitability Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
Profitability Ratios
Return on Net Worth (ROE)
Profit Before Taxes to Net Worth
Return on Assets (ROA)
Profit Before Taxes to Total Assets
Equity multiplier (leverage = TA / TE)
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
2002
$ 1,000
2003
$ 1,000
18.07%
29.09%
5.61%
8.67%
3.22 x
13.05%
21.94%
4.44%
7.21%
2.94 x
Income
Tot. asset turnover (net sales / TA)
All other income / total assets
2.32 x
0.00%
2.39 x
0.00%
Expenses
Net profit margin (NI / net sales)
COGS / net sales
Operating expenses / net sales
Sales / Net Fixed Assets
2.42%
67.22%
26.35%
12.19 x
1.86%
66.28%
28.20%
38.46%
13.66 x
[- H I S T O R I C A L -]
2004
$ 1,000
22.54%
36.24%
7.57%
11.76%
2.98 x
2.77 x
0.00%
2.73%
66.41%
27.27%
35.67%
18.20 x
RMA
6/30/03 -
3/31/04
27.7%
12.1%
2.4x
2.1x
67.3%
25.7%

Cash pays a loan not net income




Cash Assets i n 

1
D
A

Let A1 = Cash, then: m
D
A
1 i


 m j

1 j

1
D
L
D
L j j

 i n
D
NW


2
D
A i
 D
NW
Let
D
NW =
D stock +
D surplus + NI - DIV m
D
A
1
  D
L j
 n  D
A i
 D stock +
D surplus + NI DIV j

1 i

2
Let NI = Revenues - Expenses - Taxes
D
A
1
 m  j

1
D
L j
 i n 

2
D
A i
 D stock +
D surplus
+ Revenues Expenses Taxes DIV

D
A
1
 j m 

1
D
L j
 i n 

2
D
A i
 D stock +
D surplus
+ Revenues Expenses Taxes DIV
 Sources of cash are:
 Increase in any liability
 Decrease in any non-cash asset
 New issues of stock
 Additions to surplus
 Revenues
 Uses of cash are:
 Decrease in any liability
 Increases in any non-cash assets
 Repayment / refunding of stock
 Deductions from surplus
 Cash expenses, taxes, dividends

 Assets are a use of cash:
 = -(At - At-1)
 Liabilities are a source of cash:
 = +(Lt - Lt-1)
 Revenues are a source of cash:
 = +Revenues
 Expenses are a use of cash:
 = -Expenses
 Sum up each part

1.


Direct
Converts the income statement into a
“cash based income statement.”
Begins with net sales and adjusts for changes in balance sheet items.
2.

Indirect
Adjusts net income for non-cash charges and changes in balance sheet items.

1.
2.
3.
4.

Operations
Includes income statement items and all current assets and current liabilities.

Investing
Includes all long term assets

Financing
Includes all long term liabilities and equity
(except retained earnings) plus cash dividends paid.

Cash
Total of the above, but must equal the actual change in cash and marketable securities.

1.


Operating:



Cash sales:
+ Net Sales
-
D
Accounts receivables
= Cash sales
Cash purchases (negative value):





- COGS
-
D
Inventory
+
D
Accounts payable
= Cash purchases
= Cash gross margin

Operating (continued):
 Cash operating expenses (negative value):





- Operating expenses
+ Non-cash charges (dep. and amortization.)
-
D
Prepaid expenses
+
D
Accruals
= Cash operating expenses
 Other expenses and taxes:




- Other expenses + Other income
- Reported taxes
+
D
Income tax payables and deferred inc. tax
= Other expenses and taxes
 = Cash flow from operations (CFO)

2.
Investing:


- Capital Exps. =
D
Net fixed assets + depreciation
-
D
Other long term assets
 = Cash used for Investing.
3.
Financing:
 - Payments for last periods current maturity debt
 - Payments for dividends


= Payments for financing
+
D
Debt + EOP CM L-T debt
 + New stock issues
 = External Financing
4.
= Change in cash and marketable securities

Wades Office Furniture
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
Net sales
Change in accounts receivable
Cash receipts from sales
Cost of goods sold
Change in inventory
Change in accounts payable
Cash purchases
Cash margin
Total operating expenses
Depreciation & amortization
Change in prepaid expenses
Change in accruals
Change in other current assets & liab.
Cash operating expenses
Cash operating profit
Interest on marketable securities
Income on long term investments
All other expenses & income (net)
Cash before interest & taxes
Interest expense - Bank notes
Interest expense - Term notes and LTD
Income taxes reported
Change in income tax payable
Change in deferred income taxes
Cash flow from operations (CFO)
(1,995)
70
#N/A
#N/A
#N/A
#N/A
#N/A
0
0
(63)
#N/A
(141)
0
(100)
#N/A
#N/A
#N/A
2002
$ 1,000
7,571
#N/A
#N/A
(5,089)
#N/A
#N/A
#N/A
#N/A
(2,308)
71
(3)
53
0
(2,187)
455
0
0
(86)
369
(119)
0
(95)
21
0
176
2003
$ 1,000
8,184
(145)
8,039
(5,424)
(45)
72
(5,397)
2,642
(3,390)
73
35
90
0
(3,192)
301
0
0
(101)
200
(157)
0
(188)
17
0
(128)
2004
$ 1,000
12,430
(497)
11,933
(8,255)
(559)
374
(8,440)
3,493

Wades Office Furniture
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
Cash flow from operations (CFO)
Capital exp. and leasehold improvements
Change in long-term investments
Change in intangible assets
Change in other noncurrent assets
Cash Used for Investments
Payment for last period's CM Term note
Payment for last period's CMLTD
Dividends paid (DIV)
Payments for financing
Cash before external financing
Change in short-term bank debt
Change in term notes & EOP CM term notes
Change in LT debt + EOP CMLTD
Change in stock & surplus
Change in preferred stock
Change in treasury and other equities
Change in other noncurrent liabilities
External financing
Extraordinary exp. and cha. In acct. prin.
Current period accounting adjustment
Change in cash & mktbl securities
Actual change in cash
2002
$ 1,000
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
0
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
0
(130)
#N/A
#N/A
2003
$ 1,000
176
(49)
0
1
0
(48)
0
(75)
0
(75)
53
(61)
0
0
0
0
0
0
(61)
0
0
(8)
(8)
2004
$ 1,000
(128)
(157)
0
(11)
0
(168)
0
(75)
0
(75)
(371)
310
0
0
0
0
310
0
0
0
0
(61)
(61)

 Pro Forma projections of the borrower’s condition reveal:
 How much financing is required.
 When the loan will be repaid.
 Use of the loan.
 Pro Forma Projections
 Determine critical and non critical assumptions.
 Use industry projections, internal projections and judgment to determine sales projections.

 Sales
2005
= Sales
2004 x (1 + g sales
)
= $12,430 x (1 + 0.20
) = $14,916
 COGS
2005
= Sales
2005 x COGS % of Sales
= $14,916 x 0.68
= $10,143
 Sell. Exp
2005
 Int. Exp
2005
= Sales
2005 x Selling Exp. % of Sales
= $14,916 x 0.13
= $1,939
 G&A Exp
2005
= Sales
2005 x G&A Exp. % of Sales
= $14,916 x 0.122
= $1,820
= (Bank debt
2005
+ (L.T. debt
2005
= $697 x 0.145
x rate on bank debt ) x rate on L.T. debt )
+ [($75 + $50 + $350 + $225) x 0.09
]
= $186

Associate balance sheet items with sales.
 AR
2005
= Days A/R
= 50 x Average Daily Sales
2005 x ($14,916 / 365) = $2,043
 Inventory
2005
= COGS
2005
/ Inventory turnover
= $10,143 / 4.9
= $2,070
Capital expenditures from the capital budget:
 Gross fixed (GFA)
2005
= GFA
2004
+ Cap. Exp.
2005
= $791 + $400 = $1,191
 Accumulated depreciation
2005
=Acc. Dep.
2004
+ depreciation exp.
= $346 + $110 = $973
2005
Determine appropriate turnover rates from historical trends or industry averages.

Trade credit may be tied to inventory growth, thus accounts payable tied to inventory growth:
 AP
2005
= Days AP x Avg. Daily purchases
2005
= Days AP x ((COGS
2005
= 53
+
D
Inv.
2005
) / 365) x ($10,143 + ($2,070 – $1,764) / 365)
= $1,517
Principal payments on debt can be obtained from the capital budget:
 LTD
2005
= LTD
2004
+ New LTD
= $300 + $0
2005
= $225
 Term notes (TN)
2005
Note: CM = Current maturity
– CM LTD
– $75
2005
= TN
2004
+ New TN
= $0 + $400
2005
= $350
– CM TN
2005
– $50

Balance sheet definitions:
 Retained earnings (RE)
2005
= RE
2004
+ (NI
2005
– Div.
2005
) + Acct Adjust.
= $804 + ($339 – $0) + 0
= $1,893
 Stock
2005
= Stock
2004
+ New stock issues
Note: an accounting adjustment is only needed when adjustments have been made to retained earnings.

 Sales growth will determine growth in receivables, inventory and profit.
 Net Income varies directly with sales in a stable environment.
The difference in projected asset base and total funding without new debt determines additional credit needed or the Plug figure.


When Assets
2005
> (Liabilities
2005
+ Net worth
2005
)
→
Additional financing is required (notes payable plug):
Notes payable
2005
= A
2005
– (L
2005
+ NW
2005
)
When Assets
2005
< (Liabilities
2005
+ Net worth
2005
)
→
Surplus cash, invest (marketable securities (plug):
Mkt. securities
2005
= – (A
2005
– (L
2005
+ NW
2005
))

Most likely circumstances, income statement









Sales increase by 20 percent annually.
Cost of goods sold equals 68 percent of sales.
Selling expenses average 13 percent of sales,
G&A expenses average 12.2 percent of sales
Depreciation equals $110,000 annually.
Noninterest expense equals $110,000 in 2005 and
$135,000 in 2006.
Interest expense equals 14.5 percent of bank debt and 9 percent of other long-term debt.
Income taxes equal 36 percent of earnings before taxes
Income tax payable increases annually by the rate of change in 2004.
 No dividends are paid.

Most likely circumstances, balance sheet




 A/R collection improves to:
50 in 2005 and 46 in 2006.
 Inventory turnover increases to:
4.9 in 2005 and 5.1 times in 2006.
Days AP outstanding remains constant at 53.
Prepaid expenses increase by $5,000
Accruals increase by $20,000 annually.
$400,000 is loaned to purchase new equipment, with the principal repaid in 8 equal annual installments.
 depreciation on the new equip. $40,000, while depreciation on old will be $70,000 per year.


The minimum cash required is $120,000.
Other assets remain constant at $50,000.

Wades Office Furniture
Unaudited: , SIC #2522
INCOME STATEMENT
Net sales
Cost of goods sold
Gross profit
Selling expenses
Management salaries
General & administrative expenses
Research and development expenses
Depreciation & amortization
Other operating expenses
Total operating expenses
Operating profit
Interest on marketable securities
Income on long term investments
Interest expense - Bank Notes
Interest expense - Term notes + LTD
All other expenses
All other income
Total All Other Income (Expenses)
Profit before taxes
Income taxes
Extraordinary and other income (exp.)
Net income
Dividends
Retained earnings
[- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --] [-- P R O F O R M A --]
2004 % of 2005 % of 2006 % of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
51.88% 12,430 100.0% 20.00% 14,916 100.0% 20.00% 17,899 100.0%
52.19% 8,255 66.4% 22.87% 10,143 68.0% 20.00% 12,171 68.0%
51.27% 4,175 33.6% 14.33% 4,773 32.0% 20.00% 5,728 32.0%
58.67% 1,628 13.1% 19.11% 1,939 13.0% 20.00% 2,327 13.0%
0.00% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
39.47% 1,689 13.6% 7.74% 1,820 12.2% 20.00% 2,184 12.2%
0.00% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
2.82%
0.00%
73
0
0.6%
0.0%
50.68%
0.00%
110
0
0.7%
0.0%
0.00%
0.00%
110
0
0.6%
0.0%
46.88% 3,390 27.3% 14.12% 3,869 25.9% 19.43% 4,621 25.8%
73.67% 785 6.3% 15.20% 904 6.1% 22.43% 1,107 6.2%
0.00%
0.00%
31.93% 157
0.00% 0
0
0
0.0% 0.00%
0.0% 0.00%
1.3% -35.62%
0.0% #N/A
101
85
0
0
0.0% 0.00%
0.0% 0.00%
0.7% -48.49%
0.6% -16.47%
52
71
0
0
0.0%
0.0%
0.3%
0.4%
17.44% 101
0.00% 0
0.8%
0.0%
8.91%
0.00%
110
0
0.7%
0.0%
22.73%
0.00%
135
0
0.8%
0.0%
25.85% (258) -2.1% 14.76% (296) -2.0% -12.84% (258) -1.4%
113.36% 527 4.2% 15.41% 608 4.1% 39.60% 849 4.7%
97.89% 188
0.00% 0
123.0% 339
0.00%
123.03%
0
339
1.5% 16.46%
0.0% 0.00%
2.7% 14.8%
0.0% 0.00%
2.7% 14.82%
219
0
389
0
389
1.5% 39.60%
0.0% 0.00%
2.6% 39.6%
0.0% 0.00%
2.6% 39.60%
306
0
543
0
543
1.7%
0.0%
3.0%
0.0%
3.0%

Pro forma Projections: Wades Office Furniture Balance Sheet (Assets)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
ASSETS
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Deferred tax asset
Other current assets
Current assets
Gross fixed assets
Leasehold improvements
Less accumulated dep.
Net fixed assets
Notes & contracts receivable
Long-term investments
Intangible assets
Other noncurrent assets
Total Assets
[- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --] [-- P R O F O R M A --]
2004 % of 2005 % of 2006 % of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
-45.86% 72 1.6% 66.67% 120 2.3% 0.00% 120 2.1%
0.00% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
35.53% 1,896 42.3% 7.77% 2,043 38.7% 10.40% 2,256 39.6%
46.39% 1,764 39.4% 17.35% 2,070 39.2% 15.29% 2,387 41.9%
-70.00% 15 0.3% 33.33% 20 0.4% 25.00% 25 0.4%
0.00%
0.00%
0
0
0.0%
0.0%
0.00%
0.00%
0
0
0.0%
0.0%
0.00%
0.00%
0
0
0.0%
0.0%
34.45% 3,747 83.6% 13.51% 4,253 80.6% 12.56% 4,787 84.0%
17.36% 791 17.7% 50.57% 1,191 22.6% 0.00% 1,191 20.9%
17.82% 238 5.3% 0.00% 238 4.5% 0.00% 238 4.2%
24.91% 346 7.7% 31.79% 456 8.6% 24.12% 566 9.9%
14.02% 683 15.2% 42.46% 973 18.4% -11.31% 863 15.1%
0.00%
0.00%
0 0.0% 0.00%
0 0.0% 0.00%
0 0.0% 0.00%
0 0.0% 0.00%
0 0.0%
0 0.0%
28.21%
0.00%
50
0
1.1%
0.0%
0.00%
0.00%
50
0
0.9%
0.0%
0.00%
0.00%
50
0
0.9%
0.0%
30.80% 4,480 100.0% 17.77% 5,276 100.0% 8.04% 5,700 100.0%

Pro forma Projections: Wades Balance Sheet (Liabilities and Equities)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
LIABILITIES & EQUITY
[- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --] [-- P R O F O R M A --]
2004 % of 2005 % of 2006 % of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
Notes payable - bank
Accounts payable
Accrued expenses
Income tax payable
Current maturity - Term notes
Current maturity - LTD
Other current liabilities
Current liabilities
Deferred tax liability
Term notes
Long-term debt (LTD)
Other noncurrent liabilities
Total liabilities
53.26% 892 19.9% -21.85% 697 13.2% -48.49% 359 6.3%
41.19% 1,282 28.6% 18.35% 1,517 28.8% 19.52% 1,813 31.8%
34.88% 348
27.42%
0.00%
0.00%
0.00%
0.00%
79
0
75
0
0
0.00% 0
-20.00% 300
7.8% 5.75%
1.8%
0.0%
1.7%
0.0%
0.0%
27.42%
#N/A
0.00%
0.00%
41.96% 2,676 59.7% 4.93% 2,808 53.2% 0.20% 2,814 49.4%
0.00%
0.0% #N/A
6.7% -25.00%
368
101
50
75
0
0
350
225
7.0% 5.43%
1.9%
0.9%
1.4%
0.0%
0.0%
27.42%
0.00%
0.00%
0.00%
0.00%
6.6% -14.29%
4.3% -33.33%
388
128
50
75
0
0
300
150
6.8%
2.3%
0.9%
1.3%
0.0%
0.0%
5.3%
2.6%
0.00% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
31.68% 2,976 66.4% 13.68% 3,383 64.1% -3.53% 3,264 57.3%
Common stock - par
Paid-in surplus
Preferred stock
0.00%
0.00%
0.00%
600 13.4% 0.00%
100 2.2% 0.00%
0 0.0% 0.00%
600 11.4% 0.00%
100 1.9% 0.00%
0 0.0% 0.00%
600 10.5%
100 1.8%
0 0.0%
Treasury and other equities
Retained earnings
0.00% 0 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
72.90% 804 17.9% 48.41% 1,193 22.6% 45.54% 1,737 30.5%
Stockholder's equity 29.10% 1,504 33.6% 25.88% 1,893 35.9% 28.70% 2,437 42.7%
Total Liabilities and Equity30.80% 4,480 100.0% 17.77% 5,276 100.0% 8.04% 5,700 100.0%

Pro forma Projections:
Wades Office Furniture Liquidity and Leverage Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
Credit sales
Liquidity Ratios
Current Ratio
Quick Ratio
Days Cash
Days Accts Receivable (Turnover)
Days Inventory (Turnover)
Cash-to-cash asset cycle
Days AP Outstanding (Turnover)
Memo: COGS / Accounts payable
Days Cash to Cash Cycle
Est. W.C. financing Needs
[- H I S T O R I C A L -]
2004
$ 1,000
$ 12,430
1.40
0.74
Days Times
2.11 172.64 x
55.67
78.00
135.79
6.56 x
4.68 x
53.09
56.68
6.88 x
6.44 x
82.70
$1,870
4.41 x
[-- P R O F O R M A --]
2005
$ 1,000
$ 14,916
1.51
0.77
Days Times
2.94 124.30 x
50.00
74.49
127.43
7.30 x
4.90 x
53.00
54.60
6.89 x
6.69 x
74.43
$2,068
4.90 x
[-- P R O F O R M A --]
2006
$ 1,000
$ 17,899
1.70
0.84
Days Times
2.45 149.16 x
46.00
71.57
120.02
7.93 x
5.10 x
53.00
54.38
6.89 x
6.71 x
67.02
$2,235
5.45 x
[-- P R O F O R M A --]
Leverage Ratios
Debt to Tangible Net Worth
Times Interest Earned
2.05 x
4.36 x
Fixed Charge Coverage 2.09 x
Net Fixed Assets to Tangible Net Worth 46.97%
Dividend Payout 0.00%
1.84 x
4.27 x
2.19 x
52.79%
0.00%
1.37 x
7.90 x
2.89 x
36.16%
0.00%

Pro forma Projections: Wades Profitability, Cash Flow and Growth Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -]
2004
$ 1,000
Profitability Ratios
Return on Net Worth (ROE)
Profit Before Taxes to Net Worth
Return on Assets (ROA)
Profit Before Taxes to Total Assets
Equity multiplier (leverage = TA / TE)
22.54%
36.24%
7.57%
11.76%
2.98 x
Income
Tot. asset turnover (net sales / TA)
All other income / total assets
2.77 x
0.00%
Expenses
Net profit margin (NI / net sales)
COGS / net sales
Operating expenses / net sales
2.73%
66.41%
27.27%
Income Taxes to Earnings Before Taxes 35.67%
Sales / Net Fixed Assets 18.20 x
Cash Flow Ratios
CFO / (DIV + last CMLTD)
CFO / (DIV + last CMLTD + bnk notes)
-1.71
-0.13
[-- P R O F O R M A --]
2005
$ 1,000
20.56%
33.00%
7.38%
11.53%
2.79 x
2.83 x
0.00%
2.61%
68.00%
25.94%
36.00%
15.33 x
4.24
0.41
0.39
[-- P R O F O R M A --]
2006
$ 1,000
22.30%
35.58%
9.53%
14.90%
2.34 x
3.14 x
0.00%
3.04%
68.00%
25.81%
36.00%
20.74 x
6.17
1.07
0.96
Growth Rates
Sales Growth (annualized)
Cost of Goods Sold
Net Income
Total borrowed debt
Total Assets
51.88%
52.19%
123.03%
-20.00%
30.80%
20.00%
22.87%
14.82%
#N/A
17.77%
20.00%
20.00%
39.60%
-47.62%
8.04%
[-- P R O F O R M A --]

Wades Office Furniture
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
Net sales
Change in accounts receivable
Cash receipts from sales
Cost of goods sold
Change in inventory
Change in accounts payable
Cash purchases
Cash margin
Total operating expenses
Depreciation & amortization
Change in prepaid expenses
Change in accruals
Change in other current assets & liab.
Cash operating expenses
Cash operating profit
Interest on marketable securities
Income on long term investments
All other expenses & income (net)
Cash before interest & taxes
Interest expense - Bank notes
Interest expense - Term notes and LTD
Income taxes reported
Change in income tax payable
Change in deferred income taxes
Cash flow from operations (CFO)
(3,390)
73
35
90
0
(3,192)
301
0
0
(101)
200
(157)
0
(188)
17
0
(128)
2004
$ 1,000
12,430
(497)
11,933
(8,255)
(559)
374
(8,440)
3,493
(3,869)
110
(5)
20
0
(3,744)
811
0
0
(110)
701
(101)
(85)
(219)
22
0
318
2005
$ 1,000
14,916
(147)
14,769
(10,143)
(306)
235
(10,214)
4,555
2006
$ 1,000
17,899
(213)
17,687
(12,171)
(317)
296
(12,192)
5,495
(4,621)
110
(5)
20
0
(4,496)
999
0
0
(135)
864
(52)
(71)
(306)
28
0
463

Wades Office Furniture
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
Cash flow from operations (CFO)
Capital exp. and leasehold improvements
Change in long-term investments
Change in intangible assets
Change in other noncurrent assets
Cash Used for Investments
Payment for last period's CM Term note
Payment for last period's CMLTD
Dividends paid (DIV)
Payments for financing
Cash before external financing
Change in short-term bank debt
Change in term notes & EOP CM term notes
Change in LT debt + EOP CMLTD
Change in stock & surplus
Change in preferred stock
Change in treasury and other equities
Change in other noncurrent liabilities
External financing
Extraordinary exp. and cha. In acct. prin.
Current period accounting adjustment
Change in cash & mktbl securities
Actual change in cash
2004
$ 1,000
(371)
310
0
0
0
0
310
0
0
0
0
(61)
(61)
(128)
(157)
0
(11)
0
(168)
0
(75)
0
(75)
2005
$ 1,000
(157)
(195)
400
0
0
0
205
0
0
0
0
48
48
318
(400)
0
0
0
(400)
0
(75)
0
(75)
2006
$ 1,000
338
(338)
0
0
0
0
0
0
(338)
0
0
0
0
463
(50)
(75)
0
(125)
0
0
0
0
0

Bank Management, 6th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2006 by South-Western, a division of Thomson Learning