Question3 (50 marks)
Taste Sensations Pty Ltd retails quality gourmet cookingingredients to the home kitchen and small restaurant markets, whichare sourced both locally and from overseas. Recently the companyhas extended its product range to include ‘ready-to-cook’ mealssuitable for dinner parties, with customers ordering from a setmenu.
The company currently has 250 store outlets of varying sizesAustralia wide and has undertaken a focused marketing and promotionstrategy and the acquisition of several smaller competitors overthe past couple of years to expand its business. The number ofcafés stocking Taste Sensations products has increased to 600.However, only 5 new cafés have been signed-up in the last year.Products are sold on consignment through these cafés. The companyalso owns five warehouses to service the stores and caféclients.
The company’s management team is experienced, all managers havingbeen with the company more than five years. The new financedirector, who joined the company last month, is the onlyexception.
The company installed a new computer system in August 2015. Thesystem was installed by a professional computer company, and theold and new systems were run parallel for three months. The newsystem allows each outlet to process its own stocktake results,accounts payable invoices and payments. Management has experiencedno major problems with the new system to date.
Your firm, Spencer and Applebee, has acted as the auditor of TasteSensations Pty Ltd for some years, and you are currently carryingout the planning for the 30 June 2016 audit. Taste Sensations PtyLtd has an internal audit group that may be able to assist you withthis year’s audit for the first time. You have also obtained theindustry average ratios for 2016 and 2015.
Industry Averages
2016
2015
Gross Profit
0.52
0.52
Net Profit
0.18
0.20
Return on Assets
0.15
0.11
Current Ratio
0.40
0.40
Days in inventory
100 days
98 days
Days in Receivable
35 days
30 days
Days in Payables
136 days
150 days
Debt to Equity Ratio
1.83
1.65
Debt to Asset Ratio
0.65
0.62
The client has provided you with their draft financial informationin respect of the year ended 30 June 2016.
TasteSensations Pty Ltd
DraftIncome Statement
for the year ended 30 June 2016
2016
2015
$’000
$’000
Revenue
Café
Food
75,445
76,520
Beverages
23,603
21,420
Other
9,000
108,048
97,940
Stores
Food & beverages
203,368
189,610
Ready-to-cook range
8,560
12,932
211,928
202,542
Total Revenue
319,976
300,482
COS
188,264
178,188
Gross profit
Café
Food
34,770
40,270
Beverages
23,610
21,420
Other
8,730
67,110
61,690
Stores
Food & beverages
56,312
54,528
Ready-to-cook range
4,730
5,978
61,042
60,506
Total Gross Profit
128,152
122,196
Other revenue
6,560
3,098
134,712
125,294
Indirect expenses
Advertising
266
370
Bad debt expense
120
110
Cleaning
2,748
2,560
Depreciation
4,210
4,196
Fees & permits
586
578
Wages
24,899
29,750
Interest
16,538
10,422
Payroll on costs
9,170
8,925
Repairs & maintenance
4,960
5,304
Security contractors
1,092
986
Total expenses
64,589
65,956
Operating profit before tax
70,123
59,338
Taste Sensations Pty Ltd
Draft Statement of Financial Position
as at 30 June 2016
2016
2015
Notes
$’000
$’000
Current Assets
Cash
110
64
Receivables
(a)
34,858
24,690
Inventories
69,231
44,640
Total current assets
104,199
69,394
Non-current assets
Receivables
(a)
52
90
Property, Plant & Equipment
(b)
439,772
442,314
Other
(c)
93,221
70,296
Total non-current assets
533,045
512,700
Total assets
637,244
582,094
Current liabilities
Trade and other payables
(d)
310,167
300,008
Provisions
52,000
56,000
Total current liabilities
362,167
356,008
Non-current liabilities
Borrowings
(d)
44,000
44,000
Provisions
19,654
40,786
Total non-current liabilities
63,654
84,786
Total liabilities
425,821
440,794
Net Assets
211,423
141,300
Equity
Share Capital
100,000
100,000
Reserves
1200,00
120,000
Accumulated losses
(8,577)
(78,700)
Total Equity
211,423
141,300
Notes to the draft financial report
2016
2015
$’000
$’000
(a) Trade and other Receivables – current
Trade receivables
36,588
26,510
Provision for doubtful debts
(2,000)
(1,820)
34,588
24,690
Trade and other receivables – non-current
Amounts owing from related parties
52
90
(a four year loan to the financial director)
(b) Property Plant and equipment
Freehold land at cost
280,082
280,082
Buildings at cost
148,380
148,380
less accumulated depreciation
(8,210)
(7,560)
Carrying amount of buildings
140,170
140,820
Plant and equipment at cost
27,280
25,612
less accumulated depreciation
(7,760)
(4,200)
Carrying amount of plant and equipment
19,520
21,412
Total property, plant and equipment
439,772
442,314
c) Other non-current
Investment project
Capital works in progress at cost
24,448
Site lease, liquor and entertainment licence
6,200
Development expenditure at cost
13,314
43,962
Deferred tax asset
9,259
30,296
Goodwill at cost
40,000
40,000
93,221
70,296
On the 15 January 2016, the company entered into anumber of agreements for the construction and development of arestaurant and entertainment complex, and it’s leasing uponcompletion. This is Taste Sensations Pty Ltd’s first venture intothe hospitality industry.
(d) Trade and other payables and borrowings -current
Bank overdraft – secured
258,487
252,768
Trade payables
51,680
47,240
310,167
300,008
Borrowings – non-current
Secured loan
44,000
44,000
The loans and other bank accommodations are securedagainst the remaining property, plant and equipment. These loansare subject to a covenant agreement which specifies that thecompany maintain the following ratios:
net tangible asset ratio which is positive
a positive current ratio
debt to equity ratio of 2:1
e) capital expenditure commitments
Aggregate capital expenditure contracted for 30June 2016 for the construction and development of the restaurantand entertainment complex not provided for in the financialstatements.
Payable no later than one year
57,728
Payable later than one year, not later than two years
33,432
91,160
Required
(a) Based on the draft financial information provided, use Excelto:
a. Complete basic comparative analysis (5 marks)b. Calculate the ratios you think are necessary to undertakepreliminary analytical procedures. (9 marks)
(b) Using the back ground information and your findings in (a)to complete a brief report (of approximately 750 words) for AndrewChadwick, the audit partner of your firm, that:
a. Comments onratio results and other comparative analysis of the 2016/2015financials. (15 marks) b. Identifies, andjustifies, three (3) account areas that are at the greater risk ofmisstatement, and whether those accounts are likely to be over orunderstated. (15 marks) c.identifies, and justifies, one (1) assertion most at risk for eachof the accounts identified in b. (6 marks)
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