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

Brighton Food Ca, LM. (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 gif 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 C M Income Statements in der For the Year Ended 31 Dec Sale Cost of goods sold Gross profit Operating Expenses Salaries and Wages Depreciation 2018 actual 1.200.000 675,000 525,000 2019 projected 950.000 564,000 396,000 150,000 5.000 Rent 180,000 5,000 93.000 22,000 20.000 34,000 96,000 24,000 14.400 36,000 Insurance Rad debt Us Operating income Interest expense Income before income taxes Income taxes Net Income Net carmine per dare 354.000 171.000 13.200 157.800 55.600 102.200 204 325.400 70.600 10,800 59,800 17,600 42,200 084 Bean Food com Balance Sheets (in dollars) 2018 actual 2019 projected Cash Accounts recebe and equipment 100.000 240,000 190,000 55.000 $35.000 60.000 220.000 211.000 55.000 S60 Tools 140,000 110.000 108,800 90.000 198.00 Accounts payable Long tembarkan Total abilities Sharcode By Como seres 505 par) Paid in capital in excess of per Retained ang Total shareholders' equity Total Mobiles and shareholders 25,000 100,000 210,000 335.000 585.000 25.000 100,000 222,200 It has been normal practice over the past few years that Brighton Food pays a special bonus to Mr. loha Cha for rewarding his outstanding performance in managing the company to attain significant net income growth. However, there is, in fact, a condition for this bonus payment, which is that the net income growth must be maintained at 10% in each year. On the other hand, Bech Food has borrowed a long-term loan from Western Bank and one of the essential terms in the loan agrement is that the return on assets ratio must be at least 10% a year. Otherwise, Western Bank is entitled to demand for the full repayment immediately even though the bank loan is still not due Mr. John Chan also hires a financial consultant, Mt. Tim Lee, who is specialized in food business, to analyze the business situation of Brighton Food. Aber having studied the current business practices of the company, he comes up with the following important findings First, Brighton Food only purchases its goods, le inventories, from one single supplier, Le. the Apex Food Manufacturing Co., Lid., but the cost prices are generally 5-10% higher than that of the other similar suppliers in the market. Secondly, the bulk purchasing policy of Brighton Food has put the company in a disadvantageous position. As a matter of fact, the inventory turnover rate of similar companies is 10-12 times per year. Thirdly, the average collection period of the accounts receivable of Brighton Food is 70 days while that of the other similar companies is normally 30 days. Moreover, a higher than average proportion of the accounts receivable becomes lone overdue. As a result, they turn out to become uncollectible eventually, ie, bad debts. Fourthly, the company's cash is currently sitting in a bank current account, which bears no interest income at all. Fifthly, the long-term bank loan was borrowed two years ago with a fixed interest rate of 12% per annum. However, the prevailing bank loan interest rate has actually come down to a much lower level of 8% per annum recently. Lastly, as usual, Brighton Food is going to declare and pay a cash dividend of $15,000 ( 50.3 per share) to its shareholders soon after the first six months of business in a financial year In fact, Mr John Chan has connection with another bank, Eastern Bank, which may also lend money to Brighton Food. This can help the company to raise additional capital fund through debt financing However, Eastern Bank will require its potential clients to meet a series of financial ratios based on their projected financial results of the current year in order to determine the eligibility for obtaining the long-term bank loan. Requiem Este Bankinciel Ratio (a) Current ratio (b) Quick ratio (c) Total assets to total liabilities ratio (d) Debt-to-equity ratio (c) Return on assets (1) Profit margin Inventory turnover (h) Cost of goods sold percentage Being uncertain whether Brighton Food will be able to obtain the loan from Eastern Bank or not and also being very worried about the forthcoming situation in the second half of the financial year, Mr. John Chan even once thought of an idea to secretly create some fictitious key buyer companies and then place large amount of purchase order to Brighton Food on credit in December 2019 in order to boost the sales figure at the end of the year However, such kind of purchase orders will be cancelled at last, without any actual payment, in January 2020 Answer all the following questions with appropriate claborations:- (1) What are the main purposes for preparing the income statement and balance sheet? (4%) (2) What is net income? Why is net income so important to the company manager? (4%) (4%) Why are the company's shareholders always concerned about the net income? Analyze the changes of both the projected sales and net income of 2019 as compared to that of 2018 actual sales and net income. Should Mr. John Chan be worried about the projected financial situation? (12%) (5) Evaluate Brighton Food's cash position if nothing is done to tackle the current situation. Is it going to face any cash shortage problem? [Hint: consider the long-term loan from Western Bank] (12%) (6) Disc 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? (6%) (7) Based on the important findings collected by Mr. Tim measures to improve Brighton Food's net income. Lee, suggest appropriate (10%) (8) Based on the important findings collected by Mr. Tim Lee, suggest appropriate measures to improve Brighton Food's cash position. (6%) 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 results to the Easter Bank's financial ratio requirements table shown in page 3. (16%) (10) According to the answers in the Question (9), will Brighton Food be eligible to obtain a long-term bank loan from Eastern Bank? (4%) (11) If Brighton Food is currently not eligible as according to the projected financial results 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 (14%) (12) Suppose Brighton Food successfully obtains the loan from Eastern Bank after improving on the relevant aspects mentioned in the answers of Question (11). In which specific areas should this long-term financing resource be used in order to help improve the company's financial performance? (8%) - End