Question
3
(50 marks)
Taste Sensations Pty Ltd retails quality gourmet cooking
ingredients to the home kitchen and small restaurant markets, which
are sourced both locally and from overseas. Recently the company
has extended its product range to include ‘ready-to-cook’ meals
suitable for dinner parties, with customers ordering from a set
menu.
The company currently has 250 store outlets of varying sizes
Australia wide and has undertaken a focused marketing and promotion
strategy and the acquisition of several smaller competitors over
the past couple of years to expand its business. The number of
cafés 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 company
also owns five warehouses to service the stores and café
clients.
The company’s management team is experienced, all managers having
been with the company more than five years. The new finance
director, who joined the company last month, is the only
exception.
The company installed a new computer system in August 2015. The
system was installed by a professional computer company, and the
old and new systems were run parallel for three months. The new
system allows each outlet to process its own stocktake results,
accounts payable invoices and payments. Management has experienced
no major problems with the new system to date.
Your firm, Spencer and Applebee, has acted as the auditor of Taste
Sensations Pty Ltd for some years, and you are currently carrying
out the planning for the 30 June 2016 audit. Taste Sensations Pty
Ltd has an internal audit group that may be able to assist you with
this year’s audit for the first time. You have also obtained the
industry 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 information
in respect of the year ended 30 June 2016.
|
Taste |
|||
|
Draft |
|||
|
|
|||
|
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 |
|||
|
|
|||
|
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 a number of agreements for the construction and development of a restaurant and entertainment complex, and it’s leasing upon completion. This is Taste Sensations Pty Ltd’s first venture into the 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 secured against the remaining property, plant and equipment. These loans are subject to a covenant agreement which specifies that the company 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 30 June 2016 for the construction and development of the restaurant and entertainment complex not provided for in the financial statements. |
|||
| 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 Excel
to:
a. Complete basic comparative analysis (5 marks)
b. Calculate the ratios you think are necessary to undertake
preliminary 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 Andrew
Chadwick, the audit partner of your firm, that:
a. Comments on
ratio results and other comparative analysis of the 2016/2015
financials. (15 marks)
b. Identifies, and
justifies, three (3) account areas that are at the greater risk of
misstatement, and whether those accounts are likely to be over or
understated. (15 marks)
c.
identifies, and justifies, one (1) assertion most at risk for each
of the accounts identified in b. (6 marks)
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