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.

Operating profit has increased by ＄47 467 since 2020, indicating that the expansion into India was positive. An increase in marketing expenses and a 102.74% increase in sales is consistent with this, indicating that current marketing strategies have been effective.

Control over gross profit is reflected by a relatively constant gross profit ratio of 47.98% and 50.34%. While the cost of sales has increased by ＄57 425 from 2020 to 2021, as a proportion of sales, it has improved in 2021.

The significant increase in interest income from 2020 to 2021 could allow funding for future strategies to increase market share in India.

EPS increased 14.34 cents per share in 2021, so for every issued share, more earnings are made by shareholders. This is consistent with the company’s increasing profitability.

Another factor that had an impact on profit included an increase in total assets from ＄95 463 in 2019 to ＄240 859 in 2021. This aligns with an increased potential to generate revenue from an increased asset base, and with the company’s expansion into India. There has also been an increase in the tax expense, which is in line with increasing profitability.

The marked upward trend in profitability indicates that an increase in the Indian market share, without compromising the Australian market share, would be beneficial. The expansion has had a positive outcome for the company. The company should maintain its successful control over its cost of sales and continue with its highly effective marketing strategies.

The principal source of cash is derived from operations (＄77 036 in 2021, ＄24 986 in 2020 and ＄33 315 in 2019) against net cash flows of ＄72 484 in 2021, ＄13 138 in 2020 and ＄17 516 in 2019.

The cash generating power ratio of .97 is ahead of the industry benchmark of .65, indicating that cash flow from operations contributes at a level that is significantly higher than cash inflows from investing and financing to cash reserves. There is a trend of staying ahead of the industry benchmark. Of the total receipts from customers, 25% are converted to operating cash flows.

The trend shows that from entry into India in 2019 to the latest results, the operating cash flow ratio has significantly improved, with the increase from 0.06 to 0.25 showing improved liquidity. The net cash flow dollar result supports this conclusion, with $77 036 being an increase of ＄43 722 from 2019, when the company started in India.

The company is benefiting from past investments in Listed Investments (＄12 169 in 2020 and ＄16 226 in 2019), with interest income increasing.

With its performance ahead of industry benchmarks, the business is in a good financial position in terms of its liquidity, and the growth in receipts from customers supports its stability.

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.

Current ratio
Current assets/current liabilities
$= 210 465/181 996 = 1.16$
$= 221 573/169 305 = 1.31$

Quick Asset ratio:
Current assets –(Inventories + Prepayments)/current liabilities
$= 210 465 – 130 782/181 996 = 79 685/181 996 = 0.44$
$= 221 573 – 124 701/169 305 = 96 872/169 305 = 0.57$

Turnover of inventories
CoGS/Av inventories
$= 1 089 921/((124 701 + 130 780)/2) = 1 089 921/127 741$
$= 8.53$ times p.a. or $365/8.53 = 42.79$ days
$= 1 512 885/((86 272 + 124 701)/2) = 1 512 885/105 487$
$= 14.34$ times p.a. or $365/14.34 = 25.45$ days

A/c Receivable turnover
Net Credit Sales/Av Accts Receivable
$= 713 132/((91 360 + 71 174)/2) = 713 132/81 267$
$= 8.775$ times p.a. or $365/8.775 = 41.595$ days
$= 951 585/((64 635 + 91 360)/2) = 951 585/77 998$
$= 12.2$ times p.a. or $365/12.2 = 29.91$ days

Total sales have decreased from ＄1 676 801 in 2022 to ＄1 256 621 in 2023 — a decrease of 25%. Further, there has been a decline in the rate of collection of cash from credit customers from 30 days in 2022 to 42 days in 2023. This signifies serious issues with the credit policies of the business. The turnover of inventories has increased from 25 days (2022) to 43 days (2023), indicating that inventories are taking longer to sell.

Current ratios are below the benchmark of 2:1 and worsening, with a decrease from 1.31 in 2022 to 1.16 in 2023. This indicates a poor ability to cover current debts with current assets, especially with accounts receivable collections slower and interest bearing short-term liabilities increasing.

The Quick ratio has also worsened from 2022 to 2023, reflecting increasing inability to meet immediate debts and results are less than the benchmark of 1:1. This reflects the drop in current assets, notably accounts receivables, while current liabilities have increased since 2022. There has been an increase in cash and cash equivalents, but that would seem to have been influenced by the sale of ＄10 500 in investments and ＄5 518 of property, plant and equipment, which could reduce future earning potential.

Overall, the ratios are showing a decline in liquidity, placing the business in a poor cash position and at risk of defaulting on its debts, particularly with a doubling of tax liability and a high level of accounts payable.

Other plausible ratios that could have been used:

Long-term stability for The Supermarket Company is favourable. The reliance on debt to finance assets has increased from 45.39% in 2020 to just over 51% in 2023, due to fluctuations in total assets. As an example, investments were at a low in 2020 (＄726 000), rose to ＄11 377 000 in 2022 and dropped in 2023 closer to the 2020 value. The ratio shows that the funding from external parties has been relatively stable since the rise in 2021 to 50.62% and has remained close to the benchmark of 50%.

While there have been fluctuations in the total non-current assets over the four years, the current assets have shown a marked increase from 2021 to 2022, but then seem to have stabilised. Current liabilities increased from 2021 with rises in interest bearing and tax liabilities.

Accounts payable also increased from 2021 to 2022, but appear to have stabilised since. Non-current liabilities increased in 2022 but were paid down in 2023, as were interest bearing liabilities, contributing to the decrease in 2023 from 2022 in the total value of non-current liabilities.

The Supermarket Company has maintained a relatively constant debt-to-equity ratio close to 1:1 over the four years, so repayments on external funds can be met. The fluctuations discussed above have contributed to the total liabilities balance being relatively stable across the four years. The total equity figure has shown fluctuation in reserves and increases in retained earnings, particularly since 2021, providing evidence of stability.

The purchase of local grocery stores by The Supermarket Company should not be considered at this point in time. While stability of The Supermarket Company aligns with benchmarks, the company faces serious short-term liquidity issues. Cash flow is inhibited by a declining inventory turnover, with funds tied up in slow-moving stock. Significant credit policy issues are evident — cash collection rates increased over time, with a 12-day or 40% increase from 2022 to 2023. These trends must be addressed to prevent the company from defaulting on current obligations, particularly its tax liability of ＄11 724 000 — more than double that of 2022.

The desired expansion may place the company at a greater risk. Therefore, this proposal to purchase local grocery stores cannot be supported in the near future, as it will place even greater debt leverage on The Supermarket Company when it is already facing major liquidity problems.

Depreciation on Vehicle 1 was using the straight-line method.
Purchase of vehicle was paid in cash.

Actively manage accounts receivable by following up with outstanding amounts. Tighten credit sales policy, e.g. provide incentives for cash sales or early payment (discount). This will also reduce bad debts and administration loads. Currently, accounts receivable are at ＄52 800, which is 30% of credit sales. Cash collected from outstanding debtors could be used to partially finance the purchase of a new vehicle or purchase a second-hand vehicle.

Sell some or all of the shares held. The shares have a value of ＄17 000 and are returning 4.2% (＄720), so they do not make a high contribution to the overall revenue. They are reported at historical cost, so may be sold at a higher value. The cash flow from selling the shares could be used to partially finance the purchase of a new or used vehicle.