Catering Group is now operating five fine dining restaurants in Hong Kong. The group planned to open
Question:
Catering Group is now operating five fine dining restaurants in Hong Kong. The group planned to open a new restaurant in year 2023. You are the Financial Director of PP Catering Group that you will be awarded a special bonus if the net income growth could be maintained at 15% in each year, normally.
In the middle of 2021, a competitor entered the market targeting similar customers and caused a considerable loss of customers that affected the business performance seriously.
Based on the following financial statements (actual of 2021 and forecast of 2022), answer all the questions in this section. (Show your works clearly, and round the figures to one decimal place)
PP Catering Group | ||||
Statements of Comprehensive Income (in dollars) | ||||
For the Year Ended 31 Dec | 2021 actual | 2022 projected | ||
Sales | 1,400,000 | 950,000 | ||
Cost of goods sold | 675,000 | 488,000 | ||
Gross profit | 725,000 | 462,000 | ||
Operating Expenses | ||||
Salaries and Wages | 180,000 | 170,000 | ||
Depreciation | 5,000 | 5,000 | ||
Rent | 92,000 | 96,000 | ||
Insurance | 18,000 | 15,000 | ||
Miscellaneous | 20,000 | 14,400 | ||
Utilities | 44,000 | 359,000 | 46,000 | 346,400 |
Operating income | 366,000 | 115,600 | ||
Interest expense | 13,200 | 10,800 | ||
Income before income taxes | 352,800 | 104,800 | ||
Income taxes | 55,600 | 17,600 | ||
Net income | 297,200 | 87,200 |
PP Catering Group | ||
Statements of Financial Position (in dollars) | ||
Asat31Dec | 2021 actual | 2022 projected |
Assets | ||
Cash | 130,000 | 76,000 |
Accounts receivable | 240,000 | 210,000 |
Inventories | 160,000 | 180,000 |
Furniture and equipment | 65,000 | 55,000 |
Total assets | 595,000 | 521,000 |
Liabilities | ||
Accounts payable | 120,000 | 100,000 |
Long-term bank loan | 110,000 | 85,000 |
Total liabilities | 230,000 | 185,000 |
Shareholders' Equity | ||
Common shares (@$1 par) | 45,000 | 45,000 |
Paid-in capital in excess of par | 100,000 | 100,000 |
Retained earnings | 220,000 | 191,000 |
Total shareholders' equity | 365,000 | 336,000 |
Total liabilities and shareholders' equity | 595,000 | 521,000 |
3 HST4015
What is the main purpose for preparing the statement of financial position? Why is it important to shareholders?
Using horizontal analysis, calculate the percentage changes on the projected sales, rent, and net income of 2022 as compared to the actual of 2021.
Analyze and report the result of projected rent and projected net income in year 2022.
Based on the analysis result of projected net income, what is the impact on you as the Financial Director of PP Catering Group?
PP Catering Group is now required to raise additional capital fund through debt financing. The bank will require its potential clients to meet a series of financial ratios based on their projected financial results of next year in order to determine the eligibility for obtaining the long-term bank loan.
8. With reference to the financial ratios’ requirement indicated below by the bank, calculate the following financial ratios for PP Catering Group based on the projected financial result of 2022. (Show all your steps and formulae clearly)
Financial Ratios
(a) Current ratio
(b) Quick ratio
(c) Total assets to total liabilities ratio (d) Debt-to-equity ratio
(e) Net return on assets
(f) Net income to revenue
(g) Inventory turnover
(h) Cost of goods sold percentage
2.5
2.0
2.5
0.7
10%
10%
3 times 40%
Industry Average 2.0
2.4
5 times
Bank Requirement
Does PP Catering Group meet the requirement of all ratios of the bank? Briefly explain your answer.
Will it be eligible to obtain a long-term bank loan? Briefly explain your answer.
What are the four major categories of financial ratios used in ratio analysis? Give one example in each category referring to the financial ratios listed above.
By comparing to the industry averages in the above table of Question 8, comment on the financial performance of PP Catering Group by referring to the current ratio, and total assets to total liabilities ratio.