Financial Statement Analysis for Coffee Shops

This assignment delves into the analysis of financial statements specific to coffee shop businesses. It guides students through understanding key financial ratios used to assess profitability, liquidity, capital structure, and efficiency. Students will learn how to interpret these ratios and utilize them to evaluate the financial performance of a hypothetical coffee shop. The process involves examining income statements, balance sheets, and cash flow statements to draw meaningful insights into the business's health and potential for growth.

ACT507
S2 2017
Assignment 1
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Contents
Section 1: Introduction to new start business..................................................................................3
Section 2: Legal form of Business...................................................................................................3
Section 3: Source of Finance Available for the business................................................................3
Section 4: Projected Statements that are submitted with the Loan Application to bank.................4
Section 5: Role of accounting in the new business..........................................................................9
Section 6: Analyzing the Statements of accounts..........................................................................10
Section 7: Consideration of management regarding retaining or distribute of incomes...............11
References......................................................................................................................................12
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Section 1: Introduction to new start business
The new startup has been designed to be set up in Perth, Australia and the aim to this start
up is to establish the chain of own brand name that deals in fine dine in restaurants. The mission
is to start the Fine dine in restaurants that will provide best place to eat, great atmosphere and
delicious food. Aim is not restricted to provide the good food but also to provide friendly
services that will promotes the customer satisfaction (Café or coffee shop, n.d). The name of dine
in restaurants is Gabri’s bar and Restaurant. Gabri’s will provide the unique place of dine in with
Long Branch area and serve the customer with the best in class food and drinks especially from
California and France. The menu has been kept simple and precise so it is easy to understand by
the customers. Food will be available ranging from Italian, sea food, fast food, Chinese and some
Indian taste also. Size of business is kept at small scale in order to set up once and after 1 or 2
years there are plans to raise the number of restaurants.
Section 2: Legal form of Business
It has been decided to start this business between two partners on LLC basis. LLC means
Limited Liability Company that has limited liability of partner in the business. The main partners
of the business are John Miller, Safi Gingi and Andy Miller. The reason behind to chose LLC as
the legal form of business is that there will be limited investment of the partners in the business
and no personal properties were attached to the business (Reynolds, 2011).
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Section 3: Source of Finance Available for the business
There are many sources of finance available for the business and it is regarded as the
driving force for any business. Finance is required to fund the business assets and working
capital requirement. Different sources of finance are as follows:
 Loans from bank: Financial banks and credit unions provide the loan to the businesses.
Business owners have to apply to the banks for the exact amount of loan but they are
obligated for the bank terms and interest rate applicable on the bank loan amount. Interest
is regarded as the fixed charge on the loan amount borrowed from the banks and there are
payable to the banks at fixed date every month. In order to apply for loans business
owners have to furnish many documents together with the requirement of bank loan and
business viability (Fridson and Alvarez, 2011).
 Venture Investors: There are many organizations that are eager to invest in the new
business depending upon the business size and idea behind it. For this new business
owners have to locate the suitable investor that can understand the business idea and is
available to invest the required amount in the business. The motive of investor is to take
active interest in the working of business (Bull, 2007).
 Home equity or use of own money: Business owner if own any home than they can apply
for home equity line of credit to the financial bank. Banks will analysis the value of home
and provide the loan amount required. In this case there is no need of any guarantor.
Section 4: Projected Statements that are submitted with the Loan Application to bank
Loan application submitted to bank requires the projected income statement and balance
sheet to review the performance of the startup business in coming years.
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Schedule of Assets and other expenses
Start up Expenses at starting of business
Particulars Amount (in $)
Material required in Kitchen $21,600
Interior and Set-ups $16,500
Legal work $3,000
Rent of 3 months in advance $15,000
Advertising expenses $8,500
Other expenses $4,200
Total expenses at Start up $ 68,800.00
Assets required for the business
Particulars Amount (in $)
Cash Required $ 45,000.00
Current Assets (Inventory) $ 12,000.00
Fixed Assets $ 35,000.00
Total Assets $ 92,000.00
Total Requirements $ 160,800.00
Capital Furnished at owner's end $ 40,800.00
Loan from Bank $ 120,000.00
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Projected Income Statement of Three Years
YEAR 1 YEAR 2 YEAR 3
Sales $850,000 $980,000 $1,054,000
Other income $0 $0 $0
Total Revenue $850,000 $980,000 $1,054,000
Direct Cost of Sales $297,500 $372,400 $347,820
Other Costs of Sales $0 $0 $0
TOTAL COST OF SALES $297,500 $372,400 $347,820
Gross Margin $552,500 $607,600 $706,180
Gross Margin % 65.00% 62.00% 67.00%
Expenses
Payroll $90,000 $90,000 $90,000
Marketing/Promotion $17,500 $17,500 $17,500
Depreciation @ 10 % $3,500 $3,500 $3,500
Rent $60,000 $60,000 $60,000
Utilities $4,500 $5,800 $9,500
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New location setup $40,000 $54,200 $65,800
Total Operating Expenses $215,500 $231,000 $246,300
Profit Before Interest and Taxes $337,000 $376,600 $459,880
EBITDA $337,000 $376,600 $459,880
Interest Expense @ 10% $12,000 $12,000 $12,000
EBT $325,000 $364,600 $447,880
Taxes Incurred @25% $81,250 $91,150 $111,970
Net Profit $243,750 $273,450 $335,910
Net Profit/Sales 28.68% 27.90% 31.87%
(Fridson and Alvarez, 2011)
Projected Statement of Financial Position
YEAR 1 YEAR 2 YEAR 3
Assets
Current Assets
Cash
$
141,600.00
$
370,150.00
$
701,080.00
Accounts Receivable
$
272,000.00
$
313,600.00
$
337,280.00
Inventory
$
170,000.00
$
196,000.00
$
210,800.00
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TOTAL CURRENT
ASSETS
$
583,600.00
$
879,750.00
$
1,249,160.00
Long-term Assets
Long-term Assets
$
35,000.00
$
35,000.00
$
35,000.00
Accumulated Depreciation
$
(3,500.00)
$
(7,000.00)
$
(10,500.00)
TOTAL LONG-TERM
ASSETS
$
31,500.00
$
28,000.00
$
24,500.00
TOTAL ASSETS
$
615,100.00
$
907,750.00
$
1,273,660.00
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable
$
129,300.00
$
138,600.00
$
147,780.00
Current Borrowing
$
-
$
-
$
-
Tax Payable
$
81,250.00
$
91,150.00
$
111,970.00
SUBTOTAL CURRENT
LIABILITIES
$
210,550.00
$
229,750.00
$
259,750.00
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Long-term Liabilities
$
120,000.00
$
120,000.00
$
120,000.00
TOTAL LIABILITIES
$
330,550.00
$
349,750.00
$
379,750.00
Paid-in Capital
$
40,800.00
$
40,800.00
$
40,800.00
Retained Earnings
$
243,750.00
$
517,200.00
$
853,110.00
TOTAL CAPITAL
$
284,550.00
$
558,000.00
$
893,910.00
TOTAL LIABILITIES
AND CAPITAL
$
615,100.00
$
907,750.00
$
1,273,660.00
Net Worth
$
284,550.00
$
558,000.00
$
893,910.00
Section 5: Role of accounting in the new business
Accounting means to maintain books of account that will provide the financial
information of the business profitability and also helps in making the managerial business
decisions. The success of the business if highly depended upon the proper accounting of business
transactions as it will help in effective management of resources of business. The accounting of
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business transaction will provide amount of expenditures incurred to earn the year end revenue
and also gives basis to formulate the new strategies for next year in regard to decrease the
expenditures and to invest funds to the products and services that are contributes maximum to
the company revenue. The accounting department provides accounting information to each
department of the business so that proper flow of information takes place and effective decision
can be make to increase the business revenue and also the brand image (Dagwell, Wines and
Lambert, 2015). It provides the relief to the corporate social responsibility and profitability can
also be analyzed in terms of amount invested and return received. The accounting process
involves the various steps of the accounting cycle like book keeping, methods used to determine
the cost of assets and other information required to process the accounting transactions (Press,
2015).
Section 6: Analyzing the Statements of accounts
Financial statements are the comprehensive documents that provide the performance of
the company in terms of their financial profitability, liquidity, capital structure, and flow of cash.
The statements prepared in the process of statement of accounts are statement of comprehensive
income, statement of financial position and statement of cash flows (Werner and Stoner, 2010).
There are various ways to make analysis of the financial statements they are as under:
 Ratio Analysis: In this method of analyzing the financial statements involves calculating
various financial ratios and make report on the financial performance of the company.
Ratios are calculated to make analyses of profitability, liquidity, capital structure and
efficiency of business. Some of the popular ratios are current ratio, return on assets, net
profit ratio, debt equity ratio, return on equity, interest coverage ratio etc. All these ratios
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provide detail analysis of company performance and help the business owner to compare
the current performance of the company with the past performance of the business.
 Horizontal analysis: This form of analysis is popularly known as trend analysis as it
provides the increase or decrease of different items in the financial statement on year to
year basis. Starting year is taken as base and percentage of rest of years is calculated in
percentage form taking the base year as 100 percent (Sagner, 2010).
 Vertical Analysis: It is similar to the horizontal analysis but under this analysis same year
is evaluated through taking one major item as the base. For example, mostly in income
statement revenue is taken as the base and in balance total assets is taken as the base.
Section 7: Consideration of management regarding retaining or distribute of incomes
The decision to retain profits or to distribute it is in hands of management own decision.
If management think fit that retaining profits will increase the return percentage than
management must retain profits (Reynolds, 2011).
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