Problem:
Big Pig Gig & Jig (BPGJ) is an incorporated (2005) restaurant for big eaters and has a room specially reinforced for line dancing. As you can imagine the specialty at BPGJ is BBQ pork, and when the house band, Slim Jim, plays their specialty number, Stay offa my feet ‘cause I can’t dance when I’m crawlin’, the place really bounces, literally.
Business has been great at BPGJ for the past three years, but profits have been declining, and the owner, Happi G. O’Lucky, is worried. His banker, Bags O. Money, has warned Happi that his loans are going to get more expensive unless he can bring BPGJ profitability back up to the standards they agreed upon when Bags gave Happi money to buy his first hogs. Happi had no recourse but to hire an accountant, Shades O.F. Gray, his wife’s brother’s nephew, a graduate of the University of Phoenix, who had just passed the C.P.A. exam.
Happi asked Shades to look at his finances, because while Happi could cook pork hundreds of different ways, he couldn’t cook the books enough to make Bags O. Money sympathetic with his cash flow problem. Shades asked Happi for the BPGJ books so he could analyze the financial statements and see where Happi was going wrong. Here’s what he found:
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2005
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2006
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2007
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Sales - Restaurant
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$550,000
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$750,000
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$1,050,000
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Cost of sales (COS-R)
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$400,000
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$600,000
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$900,000
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Gross Profit from Restaurant
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$150,000
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$150,000
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$150,000
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Sales - Entertainment
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$200,000
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$350,000
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$475,000
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Cost of Sales (COS-E)
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$100,000
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$175,000
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$250,000
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Gross Profit from Entertainment
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$100,000
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$175,000
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$225,000
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Total Sales
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Total Cost of Sales
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Gross Profit
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Interest Expense
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Depreciation
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Overhead Expense
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Income before Tax
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Income Tax (35%)
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Income after Tax
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Analysis of COS-R:
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Salaries
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$75,000
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$85,000
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$120,000
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Hogs
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225,000
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315,000
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480,000
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Other
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100,000
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200,000
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300,000
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Selected Balance Sheet Data:
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Fixed Assets
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$500,000
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$500,000
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$500,000
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Inventory - Hogs
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$100,000
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$200,000
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$600,000
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Notes Payable - Current
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$200,000
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$400,000
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$800,000
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Current Assets
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$500,000
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$750,000
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$1,000,000
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Current Liabilities
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$300,000
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$650,000
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$1,100,000
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Total Assets
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$1,000,000
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$1,250,000
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$1,500,000
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Total Liabilities
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$500,000
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$800,000
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$1,250,000
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ASSUMPTIONS:
COS-R = Cost of Sales – Restaurant
COS-E = Cost of Sales – Entertainment
Interest expense = 10% of Notes Payable
Depreciation = 10% of Fixed Assets
Overhead Expense = 5% of Total Sales
Tax Rate = 35%
With these statistics, Shades could now analyze the financial statements and advise Happi how to reverse his declining fortunes. You are asked to help in this endeavor.
Q1. Calculate BPJG’s Income Before Tax for the years 2005-2007.
Q2. Calculate the Income After Tax assuming a tax rate of 35% for these same years.
Q3. Why is inventory control important?
Q4. Shades saw a problem with the BPGJ inventory that could be a prime cause of COS-R problems. He asks you to calculate inventory turns and the average age of the inventory for 2006 and 2007. What will be the financial impact of the change in inventory turns and aging if the trends between the two years continue? Use average inventories for the calculation.
Q5. What was Happi’s initial investment to start the restaurant?
Q6. What is the owner’s equity at the end of each year?
Q7. Calculate the current ratio for each year. What might Happi do to reverse the current ratio trend? [There are both balance sheet and income statements actions that can be taken.)
Q8. What are your financial recommendations to Shades that he can tell Happi that will correct the downturn of BPGJ’s fortunes?