Aussie Pie Analysis - Case Study Example

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AUSSIE PIE CASE By number and of Table of Contents Table of Contents 2 INTRODUCTION 4 BUSINESS IDEA: 4 PRODUCT DETAILS: 5 LOCATION: 5 PRICE: 6 PROJECTED QUANTITY: 6 FINANCE: 6 MANAGEMENT: 6 BALANCE SHEET FOR THE YEAR 2005 7 INCOME STATEMENT FOR THE YEAR 2006 8 BALANCE SHEET FOR THE YEAR 2006 8 COMMENTS: 8 VARIATION IN DEPRECIABLE LIFE FOR EQUIPMENT AND BUILDING 8 START UP COSTS CAPITALIZATION 10 CASH DIVIDEND AND THE BANK VIEW 11 ESTIMATION OF APPROPRIATE AMOUNT OF CAPITAL EXPENDITURE FOR 2006 12 CONCLUSION 12 Exhibit 13 Exhibit I – Balance Sheet For the year 2005 13 Exhibit II – Amortization Table 14 Exhibit III – Income Statement for the year 2006 15 Exhibit IV – Balance Sheet 16 References 17 Exhibit I – Balance Sheet For the year 2005 13 Exhibit II – Amortization Table 14 Exhibit III – Income Statement for the year 2006 15 Exhibit IV – Balance Sheet 16 AUSSIE PIE INTRODUCTION Financials are one of the most important parts of any business; by preparing the financials, an organization is able to analyze the amount of profitability that it is earning from the business. By preparing financial statements, particularly income statement, organization is able to quantify its profitability. Moreover, balance sheet helps the organization in showing the worth of the company. Also, balance sheet shows the amount of resources that the company has and how these resources have been financed. By preparing financial statements, the management of the company is able to distinguish its value in the market and how the company has performed. Whether business is a new startup or an already established business, preparing financial statements helps the organization in knowing the profitability and the worth of the company, therefore, it is an important part of any organization. The given report projects the financial statement for a start up business to acquire business loan. By preparing the financial statements of the organization, the management would be able to know how they have performed in one year after establishing a new business in the USA market. Initially, details of the planned business are given below on the basis of which projections are arrived at: BUSINESS IDEA: Anna Amphlett and Andrew Ferris plan to start up business in Seattle's Pike Place Market under the trade-marked name of Aussie Pies. Business would conduct production and distribution of Australian meat pies. Idea of exploring opportunity for a meat pie in the US arrived from Anna Amphlett and Andrew Ferris’s visit to Australia where the mentioned product is a national snack having huge market mainly during sports. PRODUCT DETAILS: Meat pies are hand sized pot pie made with pastry and filled with minced (ground) beef gravy. The pie has short crust bottom and flaky pastry top. The meat pie is about four inches in diameter and traditionally in hand with tomato sauce (tomato Ketchup) and accompanied by cold beer. Plan to introduce Australian meat pie in the US will mainly follow the same product details and differentiation will be offered in the quality of pies. The Aussie Pies will be of high quality with low fat beef. The Aussie Pies would be made from beef raised on ranches using no hormones or insecticides. Initially, standard meat pies would be offered and based on the level of success further specialty pies, such as steak and kidney pies, meat and sun dried tomato pies, and Barramundi pies would be offered. LOCATION: Anna Amphlett and Andrew Ferris plan to open first store in Seattle's Pike Place Market. This place is a popular destination for tourists, and they will be the basic target market. Tourists usually have curiosity for the cuisine of places they are visiting. Aussie Pies with high quality and low fat will mainly attract these tourists of Seattle. Moreover, quality raised meat being the specialty of Aussie Pies would attract health conscious young generation as well. PRICE: The price of meat pie is decided to $ 3.25 per pie. This price is relatively premium. This premium price is based on following facts: a. Using of high quality meat. b. Only freshly made meat pies will be served and not the pre-heated ones. c. High level hygiene environment of operations with production section being separated with glass wall panel from front section. This will raise customer acceptance for premium price for high quality product under high hygienic environment. PROJECTED QUANTITY: With production capacity of 30,000 pies per month in the planned set-up, first year sale has been estimated to be 28000 pies per month or 336000 per year. FINANCE: Anna Amphlett and Andrew Ferris would be contributing land equal to $100,000 against which each will be given 50,000 shares. With limited resources, Anna Amphlett and Andrew Ferris request Puget Sound Bank for the loan. Projections have been made with anticipation to receive $700,000 loan @ 6% payable in 10 years. MANAGEMENT: Anna Amphlett and Andrew Ferris initially will be taking the management positions. Anna Amphlett will be President and Chief Executive Officer. Amphlett has working experience in Starbucks Coffee shop as a regional manager and hence has considerable insight of various business aspects to conduct operations. Andrew Ferris is an accountant by training and carries work experience as assistant controller in Seatle Headquarter of Tully’s Coffee Corporation; hence, he has understanding of maintaining financial side retail business operations. On the basis of above business details, given below is the projected balance sheet at the start of business: BALANCE SHEET FOR THE YEAR 2005 Balance sheet for the year 2005 shows that the total assets have a value of $800,000 out of which $300,000 is the current assets and the remaining are the fixed assets. Funds have been raised through two main sources: bank loan and shares. Loan taken from the bank is $700,000 and the remaining $100,000 have been invested by Amphlett and Ferris. Both have contributed land worth $100,000 - each of them have been given 50,000 shares. The balance sheet for the year 2005 has been shown in the exhibit I. Land will be invested with business starters. With loan (expected) to be immediately disbursed to Aussie Pies amounting to $ 700,000, main capital expenditure of store construction of $ 200,000.00 and cooking and furniture equipment of $140,000.00 would be conducted. Other start up cost, such inventory ($ 20,000.00), Attorneys Journal fee ($60,000.00) will be paid. The rest of cash will remain available for beginning the operation in the next year. INCOME STATEMENT FOR THE YEAR 2006 In order to prepare the income statement for the year 2006, first of all interest the expense has to be calculated. Amortization table has been prepared in order to identify the interest expense and the amount of principle paid by the company in the first year. Exhibit II shows the amortization table. Income statement of the year shows that the company has earned a profit of $149,892.43. The total revenues generated in the year were $1,092,000 out of which the cost of goods sold was $430,000. Company paid cash dividends of $120,000; the remaining amount was retained by the company, and it will be shown in the balance sheet. Income statement can be found in the exhibit III. BALANCE SHEET FOR THE YEAR 2006 The value of the assets of the company has increased to $1,183,892 as the company earned revenues and profits which helped in increasing the cash. Also the company has now more inventories, and it has increased the value of the assets. Moreover, accounts receivables have also helped in increasing the total assets of the company. Capital has been raised from the investors that have invested $200,000 and got 100,000 shares in return. Balance sheet for the year 2006 can be found in the exhibit IV. COMMENTS: VARIATION IN DEPRECIABLE LIFE FOR EQUIPMENT AND BUILDING All fixed assets invested in businesses are depreciated over period of years (Kaplan, and Atkinson, 1998). The basic idea is that the fixed asset would only be able to generate revenues to the company during a fixed number of years which is considered as its life, and then it will be of no use for the company. Therefore, the assets are to be depreciated throughout their time period so that the expenses of the assets are included in the period where it is helping the company in generating revenues (Drury, 2008). It is based on requirement of accounting principle to develop contra-long term asset non cash account. The purpose of this account is to accumulate money over a period of to time to develop capacity of business to buy/expand/ replace or refurbish asset to improve and enhance the production capacity and operational capability of business. To develop this account, it is required to determine the useful life of asset. Useful life of various assets varies depending upon the type and kind of asset. This useful life is determined based on the asset’s capacity to give benefit to the business and after which the asset has to be disposed off. In the given situation, building has been depreciated over a period of 20 years and equipment over 10 years. This estimation of useful life is also based on the fact that building holds long term capacity of giving benefit to give benefit to business and would require re-investment in renovation etc. after longer period of time. Similarly, determination of useful life of machine and equipment over 10 years has a specific reason that after this period of time furniture and equipment would require to be disposed off as capacity of equipment and furniture to remain operational is comparatively less than capacity to building. Hence, varied allocation of useful lives to the assets is justified. Managers do tend to decide the life of the asset, and they depreciate the fixed assets according to their time period. The same is the case adapted by the Amphlett and Ferris that they believe that the equipments would only be able to give benefit to the company for 10 years whereas building would be good enough for a period of 20 years thus their time period of depreciation has been decided accordingly. Therefore, this makes sense as the assets should be depreciated till they give benefits to the company. START UP COSTS CAPITALIZATION Accounting suggests capitalizing the start up cost of business over the period of years. It is so suggested for the reason to spread the effect of cost accordingly (Alfredson et al., 2009). In case of non-capitalization of startup cost, business would result in huge negative balances in the beginning years, and then it would allow the business to show profits from the next years as most of the losses will be recorded in the first year or at the startup. Therefore, the business would start making profits earlier than it was suggested (Gitman, 2003). By capitalizing these costs, the startup cost over period of years can ensure smoother and early transition from negative balance of high cost incurred in initial stages of business to positive and profitable positions. Also, once the costs are capitalized, the profitability will be smoother. Capitalization of startup cost over period of years is based on type and kind of cost and period over which the mention cost will benefit the business. In the given case, the startup cost includes inventory and attorney journal fees. Constituent of startup cost of capital expenditure has also been capitalized over period of a year through depreciation account. Attorney journal fees have been spread over period of two years. This is based on the manager’s understanding regarding the capacity of business to pay off. This capitalization of attorney journal fees over two years’ period appear feasible as based on the projected revenue and expenses of business; it shows capacity of business to pay it. The time period to capitalize startup costs would vary from one business to another. Some businesses might require huge costs to startup their business; however, others would not require such a huge investment. Therefore, it is important to capitalize the startup costs accordingly. Moreover, it would also depend on the type of assets that are being capitalized by the company and thus the capitalization expense would vary from one type of business to another. CASH DIVIDEND AND THE BANK VIEW Dividends are the amount that the company distributes it to the shareholders from the net income (Gaffikin, 2008). The amount that the company retains and not distributes to the shareholders is termed as the retained earnings of the company. The amount of dividends that company pays to its shareholders varies, and there are different factors that could influence the amount paid to the shareholders. Some of the factors that would influence the decision to pay dividends to the shareholders include market trend, trying to increase the price of the shares, attracting more investors or shareholders, absence of different opportunities to make the investment, company’s policy, etc. These factors can influence the amount that the company pays to its shareholders from the net income that has been earned (Gitman, 2003). In the given case, the company has earned a net income of $149,892.43 and out of this amount $120,000 has been paid in the form of dividends to the shareholders. It reflects that almost 80% of the earnings are paid by the company as cash dividends. However, this shows that the company does not have future opportunities for investment opportunities, and this is one of the reasons why they have paid such a high proportion of dividends to the shareholders. Paying high dividends can give a negative impression or signal to the banks. The company has lent $700,000 as a loan from the bank and the bank would like the company to have more cash retained so that their liquidity position can be improved and they are able to pay off their liabilities easily. As the company has paid almost 80% of the net profits in the form of dividends, therefore, it would have a negative impact on the bank. ESTIMATION OF APPROPRIATE AMOUNT OF CAPITAL EXPENDITURE FOR 2006 Capital expenditure is sort of an investment that the company invests in its fixed assets so that their productivity and performance can be enhanced. In the year 2006, the company made a capital expenditure of $30,000 on its equipments that would be helpful in increasing its production. The capital expenditure can be estimated according to the needs and according to what the company is trying to do. As the company is planning to make capital expenditure of $30,000 in order to improve the productivity of the equipments and to increase the capacity, it would depend on what the company is trying to achieve. CONCLUSION The name of the business is ‘Aussie Pie’; the idea of this business is to introduce the famous Australian pie in the USA market. The case shows that the company has been successful in its first year of operations, and it has planned to further expand its business so that the production capacity can be increased. The report highlights that the company has achieved good amount of profits in the first year, however, a major portion of the profits has been distributed in the form of cash dividends to the shareholders which shows that the company either does not have different investment opportunities to invest; therefore, a less proportion has been retained by the company. Moreover, as the company has lent loan from the bank, it would be better for the company to retain more amount than it did so that it would have improved the liquidity position of the company. Exhibit Exhibit I – Balance Sheet For the year 2005 Exhibit II – Amortization Table Exhibit III – Income Statement for the year 2006 Exhibit IV – Balance Sheet References Alfredson, K., Leo, K., Picker, R., Pacter, P., Radford, J. & Wise, V. (2009). Applying International Financial Reporting Standards. 4th ed. New York: John Wiley & Sons. Drury, C. (2008). Management and Cost Accounting. 7th ed. Cengage Learning: EMEA. Gaffikin, M. (2008). Accounting Theory: Research, Regulation and Accounting Practice. Boston: Pearson Education. Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing. Kaplan, R., and Atkinson, A. (1998). Advanced Management Accounting. New Jersey: Prentice-Hall. Read More