Clarkson Lumber

Topics: Generally Accepted Accounting Principles, Balance sheet, Liability Pages: 5 (1188 words) Published: January 4, 2011
hult international business school|
Clarkson Lumber Company|
Adeeb Valiulla|


Experiencing rapid growth in business and generating fairly good profits, Mr. Keith Clarkson the sole owner and president of The Clarkson Lumber Company still faced a shortage of cash and found it necessary to increase his borrowings, he was therefore on a look-out to start off a new banking relationship where he could not only borrow a larger loan amount but also one that did not require a personal guarantee attached. Suburban National Bank, Mr. Clarkson’s current bank was willing to offer him a loan amount to an extent of $ 400,000 which also called for a personal guarantee. Northrup National Bank, on the other hand, was offering a loan amount of $ 750,000 with no personal guarantee, after considering detailed inquiries about Mr. Clarkson. Therefore, the above the situation leaves Mr. Clarkson in a position whether to continue his current relationship with Suburban National Bank or consider the loan offer made by Northrup National Bank, keeping in mind that once the Mr. Clarkson enters into a loan agreement with the new bank he would have to sever his relationship with his current bank. Analysis:

Following are the problems which Clarkson Lumber Company is facing. 1) Clarkson Lumber Company is already facing shortage of cash. Along with this problem he also has to pay his brother in law, Henry Holtz, for buying his stake in the company. Calculations show that current ratio of the company is not so good which tells us that company is not solvent enough to pay its short term obligations. 2)

| FY - 1993| FY 1994| FY 1995| FY 1996|
Accounts Payable| $ 213,000| $ 262,000| $ 376,000| $ 364,000|

Accounts Payable for Clarkson Lumber has been increasing over the past few years. Accounts payable are debts that must be paid off within a given period of time in order to avoid default.

| FY - 1993| FY 1994| FY 1995| FY – 1996|
Accounts Receivable| $ 306,000| $ 411,000| $ 606,000| $ 583,000|

3) Accounts Receivables on the other hand is also increasing over the past years, this means that it has made a sale but yet to collect the money from the purchaser. 4) If the company fails to generate enough profits from the amount borrowed, Mr. Clarkson’s personal belongings would be at risk. He might jeopardize his personal savings which includes his house, life insurance. Recommendation:

Thus in order to enhance Company’s performance and increase future cash flows, he should consider taking a loan from Northrup National Bank. Now, the question arises as to how much loan amount Mr. Clarkson should consider taking from Northrup National Bank. There are two options available, either he takes entire amount of $ 750,000 or he take a part of it from the bank. Exhibit 2 of the case shows that the company has already taken $ 399,000 from suburban bank in the first quarter. So taking a full amount of $ 750,000 from Northrup would not be a good idea for the company, because it will increase their notes payable by a substantial amount. Along with that, Net worth (shareholders’ equity) reduces to a very low number (i.e. $ 68,000). Thus, Mr. Clarkson should consider taking loan from Northrup National Bank; but out of the $ 750,000 which the bank has to offer, he should only take $ 364,000 as the loan amount. They have an accounts payable of $364,000. Thus, if the company borrows the same amount as the accounts payable, they can get rid of it and can use $ 399,000 to generate profits out of it. Hence, considering loan amount of $ 364,000 the balance sheet and income statement of 1996 year would be as follows. (All amounts are in thousands of dollars)

Balance Sheet| FY - 1996|
Cash| $ 53|
Receivables| $ 583|
Inventories| $ 607|
Total Current Assets| $ 1,243|
PP&E| $ 384|
Total Assets| $ 1,627|
Current Portion of debt| $ 642|
Accounts Payable...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • The Lumber Room Essay
  • Essay on Text Analysis the Lumber-Room
  • Analysis of “the lumber room” by H. Munro Essay
  • A Brief Analysis of the Hayward Lumber Company’s Environmental Strategy (Case Study) Essay
  • Lumber Room Essay
  • The Lumber-Room Research Paper
  • Plot and Precis of the Lumber Room Essay
  • Sredni Vashtar & the Lumber-Room Summary Essay

Become a StudyMode Member

Sign Up - It's Free