Question

1) What are the main purpose for preparing the income statement and balance sheet?

2) What is net income? Why is net income so important to the company manager?

3) Why are the company’s shareholders always concerned about the net income?

4) Analyze the changes of both the projected sales and net income of 2019as compared to that of 2018 actual sales and net income. Should Mr. John Chan be worried about the projected financial situation?

5) Evaluate Brighton Food’s cash position if nothing is done to tackle the current situation. Is it going to face any cash storage problem?

6) Discuss whether Mr. John Chan’s secret plan will actually help solve the company’s problem or not. But what are the potential adverse consequences if his plan is actually carried out?

7) Based on the important findings collected by Mr. Tim Lee, suggest appropriate measures to improve Brighton Food’s net income.

8) Based on the important findings collected by Mr. Tim Lee, suggest appropriate measures to improve Brighton Food’s cash position.

9) With reference to the financial ratios indicated by Eastern Bank, calculate all the financial ratios for Brighton Food, using the 2019 projected figures, and then compare each of the ratio result to the Easter Bank’s financial ratio requirements table shown in page 3.

10) According to the answers in the Question (9), will Brighton Food be eligible to obtain a long-term bank from Eastern Bank?

11) If Brighton Food is currently not eligible as according to the projected financial result for the year of 2019, which measure(s) mentioned in the answers of Questions (7) and/or (8), if implemented, should be able to help the company become eligible in the coming months?

12) Suppose Brighton Food successfully obtains the loan from Eastern Bank after improving on the relevant aspects motioned in the answer of question

(11). In which specific areas should this long-term financing be used in order to help improve the company’s financial performance?

Brightow Food Co., Ltd. (Brighton Food) is a privately owned limited company with several shareholders. It has been in the food business for many years. Mr. John Chan is the company's biggest shareholder holding 40% of the shares. He is also the company manager who takes care of the company's business operations. In the past few years, the business is blooming as both the sales and the net income have been growing steadily at around 10% per year. However, this situation has been changed a couple of months ago since another keen competing food company entered and competes keenly in the market. Since this new competitor opened, Brighton Food has gradually lost a considerable number of customers because this competitor not only offers attractive discounts, but also gives out delicate promotional gift items to its customers. Brighton Food is not able to catch up with such flexible market promotion initiatives. Mr. Chan is very worried that the annual sales and net income growths may not be able to reach 10% any more. In the middle of the year, he prepared the following projected income statement and balance sheet for the whole financial year of 2019 in order to foresee the final business results at the year end. Brighton Food Co., Lid Income Statements in dollars) For the Year Ended 31 Dec Sales 2018 actual 1,200,000 675,000 525,000 2019 projected 960,000 564,000 396,000 150,000 5.000 Cost of goods sold Gross profit Operating Expenses Salaries and Wages Depreciation Rent Insurance Bad debt Utilities Operating income Interest expense Income before income taxes Income taxes Net Income Net camnings per share 180,000 5.000 93,000 22.000 20.000 34.000 96.000 24,000 14,400 36,000 354.000 171.000 13,200 157,800 55,600 102,200 325,400 70.600 10,800 59.800 17,600 42,200 2018 actual 2019 projected Brion Food Co. Lad Balance Sheets (in dollars) As at 31 Dec Assets Cash Accounts receivable Inventories Furniture and equipment 100,000 240,000 190,000 55.000 585.000 60,000 220,000 211,000 35.000 546.000 Total assets 140,000 110,000 250.000 108,800 90,000 198.800 Accounts payable Long-term bank loan Total liabilities Shareholders' Equity Common shares (505 par) Paid-in capital in excess of par Retained carving Total shareholders' equity Total abilities and shareholders guy 25.000 100,000 210.000 335.000 585.000 25,000 100,000 222 200 347,200 546.000

Answer 1

1. Main Purpose of Preparing Income Statement and the Balance Sheet: a. Main Purpose of Preparing Income Statement: Income Statement is Prepared to find Operating results of an Entity (i.e; Whether it is Sole Trader, Partnership Firm, Company). Income Statement provides details of Revenue generated and Production and Operating Expenses incurred by the entity. It provides whether entity's operating activities resulting Profit or Loss. b. Main Purpose of Preparing Balance Sheet: A Balance Sheet discloses the Financial Position of an Entity. A Balance Sheet provides information of Total Assets (Current and Non Current), total Liabilities (Current and Non Current), Total Owners' Equity (Capital, retained earnings). 2. Net Income Means: Net Income is Total Revenue Less Total Operating Expenses. If it is a manufacturing entity, Net Income = Sales - Cost of Goods Sold - All Operating expenses and administrative expenses Importance of Net Income to the Company Manager: In several Companies, Salaries Increments and promotions to Company Manager is based on Net Income Generated by that division or the company. The Performance of a company measured based on Net Income Generated by that entity or company. So, if there is higher Net Income, there will be great efforts from the company manager. 3. Concern of Shareholders about the Net Income: Shareholders are the real owners of a company. Company's operations are done from the funds of shareholders. Generally any owner or investor expects some return for their investments. Returns to shareholder' investments are provided in the form of Dividends (Cash Dividends). And Dividends shall be issued only from the Net Income. If Company performed well, there will be net income which allows dividends to shareholders. That's why shareholders concern about the Net Income.