Financial Statements Analysis-Measurement of Performance

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Hospitality accounting and finance

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Table of Contents
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2)................................................................................................................................................3
3)................................................................................................................................................3
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10)..............................................................................................................................................5
11)..............................................................................................................................................5
12)..............................................................................................................................................6
References..................................................................................................................................7

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1)
The main purpose of preparing the income statement is to identify the profitability
and performance of the company and the balance sheet is prepared to have the knowledge
about the financial position of the business (Beaulieu, 2014). The income and expenses are
identified with the income statement and assets and liabilities are represented in the balance
sheet.
2)
Net income is the earning which is made by the business after meeting all the
expenses. This is calculated by reducing the expense which is involved from the total revenue
(Benavides-Velasco et al., 2014). The operational efficiency is reflected by net income and
that shows how well the manager has complied with the duties and responsibilities and due to
that, it is important for managers.
3)
Shareholders are concerned about the net income as their dividend depends on the
same (Neag, 2014). Shareholders invest in the company to get a return in the form of
dividend and that will be paid to them only when the net income will be made by the
company.
4)
The net income and sales which have been projected for 2019 are lower to the level
which is maintained in actual in 2018. The sale is decreasing from $1200000 to $960000 and
income is declining from $102200 to $42200. This is a point of concern for Mr. John as the
net income of the company is reducing and that will be affecting the return that is available
for him. The dividend amount will also be lowered with weak performance. The overall
performance will be reduced which will be affecting the coming periods in the long run in an
adverse manner.
5)
The cash position of the company is not good as there are fewer amounts of cash that
are available with the business in comparison to the liabilities which are required to be met. If

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nothing is done than this situation will worsen and will affect the liquidity position of the
business. The cash shortage will be faced by the company as there is a long term loan that is
involved and that will have to be repaid but the cash balance is not maintained at that level.
The amount which is available as cash is not sufficient to meet the long term loan obligations
and other liabilities which are involved in the form of trade payables. It will be required that
the improvement shall be made to manage effective liquidity.
6)
The secret plan of Mr. John to create fictitious sales will resolve the problem of the
company for once by increasing the sales and thereby profits but the company will not have
actual income. This will not help the company in the long run and when next year the same
will be eliminated then it will raise a high amount of bad debts which is also adverse for the
company. The plan will have adverse impact in the coming period when the bad debts will be
recognized and also if the plan will be disclosed then the name of the business will be spoiled
and its image will be deteriorated which will be hazardous for the company in process of
raising funds and no one will be willing to invest in the business.
7)
The various improvements will be required to improve the net income and in that
supplier will be changed to reduce the cost. The purchasing policy will be altered to achieve
the appropriate turnover rate. The collection policy of the company will be modified and the
collection of the receivables will be made in the earlier period by which cash position will be
improved (Ahrendsen & Katchova, 2012). The loan shall be taken on fluctuating rates so that
the impact of changes can be made and a decreased rate will be applied to reduce the interest
obligation. The dividend policy will be altered as per the earnings which are made and the
profits will also be required to be used in an effective manner to increase further returns.
8)
The cash position of the business is required to be earned and for that, the collection
period in respect of accounts receivables will be reduced and by that the amount will be
collected on time. This will also be reducing the bad debts and by that, the overall cash
position will be improved.

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9)
The ratios have been calculated and they are shown below.
Particulars Formula Ratio
Current ratio Current asset/current liabilities 4.51
quick ratio quick asset/current liabilities 2.57
Total assets to total liabilities
ratio
Total assets/ total liabilities 2.75
Debt to equity ratios Total debt/total equity 0.57
Return on assets Net profit/total assets*100 7.73%
Profit margin Net profit/Sales*100 4.40%
Inventory turnover COGS/Inventory 2.67
Cost of goods sold percentage COGS/sales*100 58.750%
According to standards of the bank, the current ratio shall be more than 2 and so the
same is fulfilled as it is higher at 4.51 and in a similar manner quick ratio shall be minimum 1
and it is also higher which is good. The total asset to liability ratio is 2.75 which is higher
than the minimum limit of 2.5 and so the same is also met (Sultan, 2014). The debt to equity
shall be lower than 0.75 and the same is at 0.57 which is appropriate as per the needs. The
requirement for return on assets and net profit margin is 9% and 6% respectively and it is not
completed in both the cases which are against the set standards. The inventory turnover shall
be at least 5 times but it is very lower which is also not appropriate. The cost of goods sold
percentage should not be high than 45% which in the given case is 58.75% and that is not in
terms of the requirements.
10)
The calculations have been made and as per them, there are various requirements that
are not fulfilled by the company (Halkos & Tzeremes, 2012). Due to this, the bank will not be
granting the loan to the business as the set criteria are not adhered to in a proper manner.
11)
The measure of changing the supplier and reduction of bulk purchase shall be
implemented. By them, the cost of goods sold will be reduced and that will help in raising the
net income. Also, the inventory turnover will be raised by declining the bulk purchasing
which is made and that will satisfy the bank requirements. The ratios which are not in the
limit will be reached to that level after making these changes.

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12)
If the loan will be granted then, the same shall be spent on promotion as by that
customer will be attracted. With that, there is the need to offer the discounts which other
competitors are doing to gain and retain a large number of customers. The gifts which are
given to the customers shall be improved and shall not be too delicate. The complete
operational efficiency will be improved by making the change in the production process and
offering good quality food which will help in gaining customer loyalty and satisfaction for
long-run success.

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References
Ahrendsen, B. L., & Katchova, A. L. (2012). Financial ratio analysis using ARMS
data. Agricultural Finance Review, 72(2), 262-272.
Beaulieu, P. (2014). Voluntary Income Reporting. Accounting Horizons, 28(2), 277-295.
Benavides-Velasco, C. A., Quintana-García, C., & Marchante-Lara, M. (2014). Total quality
management, corporate social responsibility and performance in the hotel
industry. International Journal of Hospitality Management, 41, 77-87.
Halkos, G. E., & Tzeremes, N. G. (2012). Industry performance evaluation with the use of
financial ratios: An application of bootstrapped DEA. Expert Systems with
Applications, 39(5), 5872-5880.
Neag, R. (2014). The effects of IFRS on net income and equity: evidence from Romanian
listed companies. Procedia economics and finance, 15, 1787-1790.
Sultan, A. S. (2014). Financial Statements Analysis-Measurement of Performance and
Profitability: Applied Study of Baghdad Soft-Drink Industry. Research Journal of
Finance and Accounting, 5(4), 4956.