You Evaluate Loan Requests as Part of Your Job at Eastwood

question 2

Essay

You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small company. Richard Tracy, the CEO, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31.
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While you are willing to work with Richard, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request?

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Definitions:

Fixed Component

A cost or part of a cost that remains unchanged regardless of changes in the level of output or activity.

Predetermined Overhead Rate

An estimated rate used to allocate manufacturing overhead costs to individual products or job orders based on a specific activity measure, like labor hours or machine hours.

Machine-Hours

A measure of production activity that quantifies the number of hours machines are operated in the production process.

Fixed Component

A cost that does not change with the level of output or activity over a particular period of time.