Question - Nelson Marlborough Institute of Technology

ASSIGNMENT

Task/Activity Instructions:

You work as a financial analyst for an investment bank. You have been asked to prepare a report assessing the financial results and investment attractiveness of Golden Chip Takeaways. This report is to be based on the attached set of annual financial statements for the Golden Chip Takeaways shop.

Your report should cover your assessment of the following:

The business's profitability. Consider both how good or poor the profit performance is, and identify the reasons for any change in profitability.

The business's financial stability, both immediate and longer term.

How well assets have been managed and utilised.

Your conclusion as to whether the business represents a good investment or not.

Your report should be based on appropriate ratios and information provided. Calculate and include the ratios as an appendix to your report.

Please state any assumption/s, and the reasoning for the assumption/s, that you make in your analysis.

CASE STUDY GOLDEN CHIP TAKEAWAYS:

After looking at the financial statements prepared by his accountant, Graham Charr, the owner of Golden Chip Takeaways is very pleased with the performance of the fish and chip shop. The sales turnover for the year was $450,000 which is the best ever sales result of the business, and there was a great profit shown.

Graham's bank has reviewed the financial statements and has indicated its concern over the cash position and in particular the buildup of stock. Graham cannot understand this and tells his bank manager, "You can expect some stock as I have to be able to supply my customers with fish and chips". Concerned at the bank's comments, Graham asks you to investigate the financial statements further.

Golden Chip Takeaways

Income Statement

for the year ended 31 March 2014

2014

2013

Sales 450,000 300,000

Opening Stock

2,800

2,000

Plus Purchases 150,300 84,300

Less Closing Stock 15,000 2,800

Cost of goods sold 138,100 83,500

GROSS PROFIT 311,900 216,500

Operating Expenses

Accounting fees

2,000

1,500

Advertising & promotion 3,500 600

Bank Charges 450 300

Depreciation 12,000 6,400

Electricity 13,500 12,300

Insurance 4,000 3,800

Kitchen supplies 11,500 10,800

Maintenance 4,600 4,300

Packaging 4,000 2,300

Rent 26,000 26,000

Telephone 850 700

Vehicle expenses 4,500 3,200

86,900 72,200

NET PROFIT $225,000 $144,300

Golden Chip Takeawsy

Balance Sheet

as at 31 March 2014

Current Assets

2014 2013

Cash on hand 350 200

Bank 500 8,700

Accounts receivable 1,500 500

Inventory 15,000 2,800

Non-current Assets

17,350 12,200

Property, plant & equipment 65,000 40,000

Less accumulated depreciation 18,400 6,400

46,600 33,600

TOTAL ASSETS $63,950 $45,800

Current Liabilities

Accounts payable 5,950 5,300

Non-current Liabilities

Bank term loan 20,000 5,000

TOTAL LIABILITIES 25,950 10,300

Owner's Equity

Capital 28,000 28,000

Net profit 225,000 144,300

less drawings 215,000 136,800

TOTAL OWNER"S EQUITY 38,000 35,500

TOTAL LIABILITIES & OWNER'S EQUITY $63,950 $45,800

In addition, Graham has obtained the following financial ratios for comparison purposes.

Industry

Average

Gross profit margin 80%

Operating expenses ratio 17%

Working Capital ratio $2.10:$1

Liquidity ratio $1.00:$1

Equity ratio 65%