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

4. What is the main purpose for preparing the statement of financial position? Why is it important to shareholders? 

5. Using horizontal analysis, calculate the percentage changes on the projected sales, rent, and net income of 2022 as compared to the actual of 2021. 

6. Analyze and report the result of projected rent and projected net income in year 2022. 

7. 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

9. Does PP Catering Group meet the requirement of all ratios of the bank? Briefly explain your answer. 

10. Will it be eligible to obtain a long-term bank loan? Briefly explain your answer. 

11. 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. 

12. 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.