Question

Brighton 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. 2018 actual 1.200.000 675,000 525,000 2019 projected 960,000 564,000 396,000 Brighton Food Co., Ltd. Income Statements in dollars) For the Year Ended 31 Dec Sales 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 eamings per share 180,000 5,000 93,000 22,000 20,000 34,000 150,000 5.000 96,000 24,000 14.400 36.000 354.000 171.000 13.200 157,800 55,600 102,200 2.04 325,400 70,600 10,800 59,800 17,600 42,200 0.84 2018 actual 2019 projected 100,000 240,000 190,000 55,000 585,000 60,000 220,000 211,000 55,000 546.000 Brighton Food Co., Ltd. Balance Sheets (in dollars) As at 31 Dec Assets Cash Accounts receivable Inventories Furniture and equipment Total assets Liabilities Accounts payable Long-term bank loan Total liabilities Shareholders' Equity Common shares (@$0.5 par) Paid-in capital in excess of par Retained eammgs Total shareholders' equity Total liabilities and shareholders' equity 140,000 110,000 250,000 108,800 90,000 198,800 25,000 100,000 210,000 335.000 585.000 25,000 100,000 222,200 347,200 546.000

Answer 1

As per policy, only four parts of a question are allowed to answer at a time, so please find first four parts duly answered here:

1)The purpose of the Statement of Financial position ie. income statement and balance sheet is to acertain the income over a period of time through comparing the Revenues and expenses pertaining to that period and determine the current financial situation concerning the assets and liabilities and owners’ equity. The purpose of making these Financial statements is to make important decisions for the forthcoming period.

2) The net income is resultant net revenue over the total expenses over the period ie. cost of goods sold, selling, general and administrative expenses. This is the benefits to the owner’s of the business to undertake the risk and employing initial capital for operations.

The net income figure is very important to the company managers because their emoluments like salaries and bonuses are based on the net income achieved.

3) The company’s shareholders always concerned about the net income because it denotes their benefits for making investments in the business of the company. The dividend and the future growth of the shareholders are depend on the net income figure achieved. Higher the net income, higher will be the dividend and future growth in income.

4)The projected sales and net income of 2019 has shown a lowering of the operations in comparison of actual of 2018. The actual sales and net income of 2018 is $1.2m and $0.102m and the projected corresponding figures for 2019 are $0.96m and 0.042 respectively.

Yes, Mr. John Chan, the biggest shareholder, should be worried about the projected financial situation because of the same reason that the company has scaled down the operations and resultant net income.

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(please post the remaining requirement separately )

Answer 2

1. The main purpose of preparing:

Income Statement – To evaluate the solvency position of the company

Balance Sheet – To evaluate the financial position of the company.

2. Net Income is the final income that a company has earned in a fiscal year after the payment of all expenses and tax liability.

The net income is very important for the manager (John) as he will get his special bonus only if the net income growth rate is 10% or above.

0. 3. The company’s shareholders are often concerned about the net income, due to two reasons:
1. The market value of the company improves if it portrays positive income and growth.
2. The dividend is often determined as a fixed percentage or ratio of the net income.

4. Change in Sales = $ (240,000)

Change in Net income = $ (60,000)

Yes, John should be worried about the current financial position as it is depicting negative returns.

5. The cash position of the company will get adverse as according to the projected measure, cash will be $ 60,000.

The return on assets ratio (2019) will be 7.7% - which is less than the required rate (10%) by the western bank.

Due to this decrease, the bank would ask for a repayment which will leave the company cashless.

6. The secret plan of fraudulently making fake buyers is an illegal attempt and a felony fraud. That plan would never have worked because the truth would have been caught in scrutiny procedure of the eastern bank. The Company as well as John would have been legally prosecuted for the offense.

0. 7. Measures to improve the net income are:
1. Consider other suppliers of raw material for cheaper items.
2. Proper procedure of accounts receivables to reduce bad debts.
3. Consult the western bank regarding the changes in the interest rates.

8. Measures to improve cash position are:
   1. Maintenance of return to assets in required limits.
   2. Prevention of bad debts

9. The required data is as follows:

RATIOS	EASTERN BANK REQ.	2019 PROJECTED
CURRENT RATIO	2	4.51
LIQUID RATIO	1	2.57
TOTAL ASSETS TO TOTAL LIAB. RATIO	2.5	2.74
DEBT-EQUITY RATIO	0.75	0.26
RETURN ON ASSETS	9%	7.73%
PROFIT MARGIN	6%	4.4%
INVENTORY TURNOVER	5 times	2.81 times
COGS %	45%	58.75%

10. No, the company has failed to meet all the criteria of eligibility for the loan.
11. If all the measures are carried out efficiently, the company will satisfy the ratios and will be eligible for the loan.
12. The loan can be used to:
    1. Enhance the technological know-how and production capacity in order to compete in the market.
    2. Pay off western bank’s loan as it carries a huge interest rate.