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PP Catering Group is now operating five fine dining restaurants in Hong Kong. The group planned to open a new restaurant in year 2023. You
PP Catering Group is now operating five fine dining restaurants in Hong Kong. The group planned to open a new restaurant in year 2023. You are the Financial Director of PP Catering Group that you will be awarded a special bonus if the net income growth could be maintained at 15% in each year, normally. In the middle of 2021, a competitor entered the market targeting similar customers and caused a considerable loss of customers that affected the business performance seriously. Based on the following financial statements (actual of 2021 and forecast of 2022), answer all the questions in this section. (Show your works clearly, and round the figures to one decimal place) PP Catering Group Statements of Comprehensive Income (in dollars) For the Year Ended 31 Dec 2021 actual 2022 projected Sales 1,400,000 950,000 Cost of goods sold 675,000 488,000 Gross profit 725,000 462,000 Operating Expenses Salaries and Wages 180,000 170,000 Depreciation 5,000 5,000 Rent 92,000 96,000 Insurance 18,000 15,000 Miscellaneous 20,000 14,400 Utilitites 44,000 359,000 46,000 346,400 Operating income 366,000 115,600 Interest expense 13,200 10,800 Income before income taxes 352,800 104,800 Income taxes 55,600 17,600 Net income 297,200 87,200 PP Catering Group Statements of Financial Position (in dollars) As at 31 Dec 2021 actual 2022 projected Assets Cash 130,000 76,000 Accounts receivable 240,000 210,000 Inventories 160,000 180,000 Furniture and equipment 65.000 55,000 Total assets 595.000 521.000 Liabilities Accounts payable 120,000 100,000 Long-term bank loan 110,000 85,000 Total liabilities 230,000 185,000 Shareholders' Equity Common shares (@S1 par) 45,000 45,000 Paid-in capital in excess of par 100,000 100,000 Retained earnings 220,000 191,000 Total shareholders' equity 365,000 336,000 Total liabilities and shareholders' equity 595.000 521.000 4. What is the main purpose for preparing the statement of financial position? Why is it important to shareholders? (4 marks) 5. Using horizontal analysis, calculate the percentage changes on the projected sales, rent, and net income of 2022 as compared to the actual of 2021. (6 marks) 6. Analyze and report the result of projected rent and projected net income in year 2022. (4 marks) 7. Based on the analysis result of projected net income, what is the impact on you as the Financial Director of PP Catering Group? (4 marks) PP Catering Group is now required to raise additional capital fund through debt financing. The bank will require its potential clients to meet a series of financial ratios based on their projected financial results of next year in order to determine the eligibility for obtaining the long-term bank loan. 8. With reference to the financial ratios' requirement indicated below by the bank, calculate the following financial ratios for PP Catering Group based on the projected financial result of 2022. (Show all your steps and formulae clearly) Financial Ratios (20 marks) Bank Industry Requirement Average (a) Current ratio 22.5 2.0 (b) Quick ratio 22.0 (c) Total assets to total liabilities ratio 22.5 2.4 (d) Debt-to-equity ratio 0.7 (e) Net return on assets 10% (f) Net income to revenue 10% 3 times 40% 5 times (g) Inventory turnover (h) Cost of goods sold percentage 9. Does PP Catering Group meet the requirement of all ratios of the bank? Briefly explain your answer. (2 marks) 10. Will it be eligible to obtain a long-term bank loan? Briefly explain your answer. (2 marks) 11. What are the four major categories of financial ratios used in ratio analysis? Give one example in each category referring to the financial ratios listed above. (8 marks) 12. By comparing to the industry averages in the above table of Question 8, comment on the financial performance of PP Catering Group by referring to the current ratio, and total assets to total liabilities ratio. (4 marks)
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