Scenario

Kelly Tate has been running a cake making business from home for the last 3 years. Kelly has named her business Kellys Cakes. When she started her business, her goal was to be able to work from home, whilst raising a family. She also wanted to make a profit that would help to sustain the business in its early years. For the last 3 years she has operated successfully, slowly building her business and it has now reached its peak. Operating from home is not really an option and Kelly is considering her alternatives.

She has decided that she would like to now open a shop in the local shopping centre at Berwick and has approached you to help her with her plans and provide business and financial advice. She believes the move will help her business grow and develop further. Her goals are to expand her client base, increase sales, increase profits and build a solid reputation in the industry.

One of the first things Kelly wants to do is get some advice regarding the performance of her home-based business in the last 3 years. This will help her to decide how she should proceed with her plans to open a shop. Kelly has provided you with financial statements that have been prepared by her registered Accountant, Tom Smith. Tom has been in practice for many years and has been doing Kellys accounts and returns during her time in business. He is registered with the Certified Practising Accountant and the Tax Practitioners Board. He proudly displays his Masters in Accounting and registration certificates on the wall in his office.

PR1 -Task 1 Analyse Data and Provide Performance Advice

You have been asked to analyse the businesses financial statements, using standard financial analysis techniques and write a report to the owner which:

1. Reports on the profitability, financial stability and activity of the business

2. Makes recommendations to improve financial performance and stability in the future.

PR 1.1 Steps to take

Analyse the information given below by Kelly:

• Check the accuracy of the financial statements.
• Reconcile the data to ensure that it complies with statutory requirements.
• Using financial analysis techniques, analyse the financial reports. Provide advice to the Kelly as to whether each item you analyse has improved, deteriorated or had no change.
• Based on your analysis of these financial statements write a brief report on the profitability, financial stability and activity of the business and make recommendations to improve financial performance and stability.
• In your report you will need to cover the following:
  • Analyse the trends and state whether each item you analyse has improved, deteriorated or had no change.
  • Use these trends as benchmarks to evaluate the following:
    • Profitability of the business
    • Liquidity (Stability) of the Business to meet its short-term commitments
    • Efficiency of the business (how effectively it uses its assets)
    • Financial Potential of the business
  • In your evaluation of the business identify two (2) problems and two (2) improvement opportunities.

Instructions

This report needs to be of a quality that it can be given to a client. Presentation is of the highest importance. You should prepare this report using Word processing software. Include a front cover in your report

All numerical work should be rounded to 2 decimal places.

The following sections should be used in this report:

Section 1 - Executive Summary Provide an overall summary of the findings of your analysis

Section 2 - Trend analysis

Complete the following table and include this table in your report

Section 3 Based on the ratios above you need to comment on:

• Profitability
• Liquidity
• Efficiency
• General comments on Future potential and business viability

Section 4 - Problems and Recommendations From your findings discuss two (2) problems you have found and make two (2) recommendations to address these problems

SKellys Cakes Accountant Tom has provided you with the Financial Statements below.

The following additional information will be needed:

2016 Accounts Receivable $10,000

2016 Inventory $10,000

Answer the following questions below:

P

PR 1.3 How did you determine the reliability of the Financial Statements

PR 1.3 How did you determine the reliability of the Financial Statements

Ratio 2017 16.00% 2018 9.00% 2019 4.62% Trend Analysis Deteriorating Ex: Return on Equity ratio (sample data above) Gross Profit Margin Net Profit Margin Return on Investment Return on Equity Current Ratio Quick Ratio Inventory Turnover Rate Inventory Turnover Days Accounts Receivable Collection Period Accounts Receivable Turnover Total Asset Turnover 2017 $000's 2018 $000's 2019 $000's Kelly' Cakes Balance Sheets EQUITY Owners equity Retained Profits 50 28 78 52 28 80 80 18 98 ASSETS Current Bank Inventory Accounts Receivable 0 18 10 10 10 30 0 13 13 26 20 36 160 185 250 286 190 211 Non-Current Property. Plant & Equipment TOTAL ASSETS LIABILITIES Current Bank Overdraft Accounts Payable Provisions, Accruals & Tax Liabilities 9 8 10 8 26 10 12 10 32 15 Non-Current Long Term Loans TOTAL LIABILITIES NET ASSETS 97 112 78 105 131 80 158 188 98 2017 $000's 2018 $000's 2019 $000's Kelly's Cakes Income Statements Sales - Cash Sales - Credit 20 100 25 110 135 55 30 120 150 72 120 50 Less Cost of Goods Sold GROSS PROFIT Less Expenses 70 80 78 12 Selling Administration Finance 10 3 10 10 6 12 18 Profit (before interest) Less Interest Profit (before tax) Less Income Tax Net Profit 47 7 40 12 52 12 40 44 19 25 7 12 28 28 18 Ratio 2017 16.00% 2018 9.00% 2019 4.62% Trend Analysis Deteriorating Ex: Return on Equity ratio (sample data above) Gross Profit Margin Net Profit Margin Return on Investment Return on Equity Current Ratio Quick Ratio Inventory Turnover Rate Inventory Turnover Days Accounts Receivable Collection Period Accounts Receivable Turnover Total Asset Turnover 2017 $000's 2018 $000's 2019 $000's Kelly' Cakes Balance Sheets EQUITY Owners equity Retained Profits 50 28 78 52 28 80 80 18 98 ASSETS Current Bank Inventory Accounts Receivable 0 18 10 10 10 30 0 13 13 26 20 36 160 185 250 286 190 211 Non-Current Property. Plant & Equipment TOTAL ASSETS LIABILITIES Current Bank Overdraft Accounts Payable Provisions, Accruals & Tax Liabilities 9 8 10 8 26 10 12 10 32 15 Non-Current Long Term Loans TOTAL LIABILITIES NET ASSETS 97 112 78 105 131 80 158 188 98 2017 $000's 2018 $000's 2019 $000's Kelly's Cakes Income Statements Sales - Cash Sales - Credit 20 100 25 110 135 55 30 120 150 72 120 50 Less Cost of Goods Sold GROSS PROFIT Less Expenses 70 80 78 12 Selling Administration Finance 10 3 10 10 6 12 18 Profit (before interest) Less Interest Profit (before tax) Less Income Tax Net Profit 47 7 40 12 52 12 40 44 19 25 7 12 28 28 18