VCAA Accounting Budgeting and decision-making

Health Foods
Statement of Profit or Loss for year ended 30 June

Health Foods
Statement of Financial Position as at 30 June

Owing to the projected increases in sales of 30% and cost of goods sold of 15%, Tamara’s gross profit is estimated to increase from 71.67% to 74.94% or by ＄15 450 in 2025. This reaches the benchmark of 75%. There is also a very pleasing increase in net profit from ＄7 418 to a projected ＄22 868 or from 12.36% in 2024 to 29.32% in 2025. Once again, these compare favourably with the current benchmark of 30%.

With the ROE of 17.41% increasing to 41.02% and the current ratio increasing from 3.74:1 to 8.07:1, the benchmark results of 40% and 2:1 respectively have been easily met. The ROE shows a healthy return and the level of the current ratio suggests the business is well able to meet its debts in the short term. With the cash balance of ＄36 889, Tamara could consider repaying the loan of ＄7 000 before the due date.

The expenses are projected to remain constant at 2024 levels. Tamara’s results are excellent overall and represent an outstanding opportunity for a ‘bricks and mortar’ business to acquire a profitable and growing ‘online’ business in order to diversify and expand.

A purchase of bank bonds for ＄99 970 is reflected in non-current assets and the cash flow. This money could have been used to reduce operating costs, attract more passengers and improve profitability.

Deferred tax assets have appeared in 2020. These will offset future tax debts and reduce cash outflows in a future period.

The business has purchased (＄145 570) and sold (＄62 670) property, plant and equipment during the year, reflecting the expansion of its fleet and offices.

The business is highly geared at 75% against the industry benchmark of 60%, so it would need to issue shares and pay down debt. Finance costs have been growing, supporting the interpretation of the business being highly geared.

Income from operations has dropped by ＄98 830 from 2019 (see cash receipts from customers, which have reduced by ＄147 530). Borrowings have increased by ＄1 156 000. One share issue raised ＄310 460, so another share issue may be needed to increase cash flow. The share issue has been put towards paying off existing borrowings. More borrowings were needed to help meet the cost of payments for other deposits and for purchases of property, plant and equipment. The current ratio and acid test for the business are below the industry average, indicating liquidity issues.

The company must focus on consolidation in Queensland as a priority before expansion. It should show improvements in liquidity and gearing. Expansion requires extensive capital expenditure with high risk, particularly when considering the drop in operating cash inflows.

XYZ Catering Company’s net profit has decreased to ＄59 173 in 2023. Total revenue increased by 1.35%, while expenses increased by 1.98%. This has resulted in a decrease of 13 cents in EPS and ROE decreasing from 18.2% to 16.2%.

The 84.3% decrease in Other income from ＄3 254 to ＄511 has negatively impacted profitability. Reasons could include a reduction in interest revenue due to decreases in cash and equivalents, and/or financial asset investments.

If the expansion proceeds, inventories costs may increase significantly to stock the additional equipment. Liquidity should not be negatively impacted, as inventories could be funded from cash and cash equivalents.

Trade and other receivables have increased ＄23 102. Further credit sales could increase the risk of bad debts. If liquidity and cash flow are not monitored closely, payment of trade and other payables, which have increased ＄22 466, could be further impacted.

If equipment is sold, as well as leased, the possible decrease in lease revenue could be offset somewhat if the business moves into repairs and maintenance of equipment that has been sold.

The board should proceed with the expansion, especially given the success of the trial. Once established, additional sales should increase net profit. The introduction of a tight credit policy is recommended to ensure prompt payment is received from trade and other receivables. This should result in an improved cash position, a reduction in bad debts and the ability to pay trade and other payables in a timely manner to maintain an excellent business reputation.

Notes

Valid: sound, well-founded; legitimate and able to be supported.
Relevant financial data and information may include:

Profitability

• net profit ratio
• NP/net sales x 100
• 2023: $\frac{62\,707}{677\,378} \times 100 = 9.26\%$
• 2024: $\frac{59\,173}{686\,496} \times 100 = 8.62\%$
• ROE: is provided in stimulus

Liquidity

• Current ratio
• 2023: $\frac{580\,316}{401\,724} = 1.44:1$
• 2024: $\frac{599\,436}{419\,204} = 1.43:1$
• Turnover of a/c receivable
• 2024: $\frac{678\,811}{(172\,353 + \frac{195\,455}{2})} = 3.69$ times or 99 days approximately

Stability

• Equity: 45%
• Liabilities: 55%

Other relevant relationships/trends/ratios may include:

• current tax receivables increased by 169.26% or ＄2 544
• investment in joint ventures increased by 331.94% or ＄12 741
• PPE increased by 18.48% or ＄10 245
• intangibles increased by 5.34% or ＄6 131
• trade and other payables increased by 6.1% or ＄22 466
• borrowings increased by 65.81% or ＄8 447
• or other suitable response consistent with a reasonable understanding.