Samantha Jamieson

NTDT 30313
Case Study #3
50 points
Due 4/24/2017

Financial Management
Objectives:

At the completion of this case study, students should be able to:

1. Identify the information needed to perform ratio analysis.

2. Analyze financial data to assess an organizations ability to pay debt.
3. Identify the information needed to perform break-even analysis.
4. Calculate inventory turnover ratio.
5. Evaluate an organizations overall financial status.
6. Evaluate an organizations operating budget.

This assignment satisfies the following ACEND Required Core Knowledge for the RDN:

KRDN 4.2: Evaluate a budget and interpret financial data.

KRDN 4.6: Analyze data for assessment and evaluate data to be used in decision-making for
continuous quality improvement.
CRDN 4.8: Develop a plan to provide or develop a product, program or service that includes a
budget, staffing needs, equipment and supplies.

Case Narrative:

The Waterfront Restaurant is a small local restaurant in a popular tourist area on the coast of
Rhode Island. They are open year round, with their peak season from Memorial Day weekend
(end of May) until Labor Day weekend (beginning of September). On April 1, the value of
inventory on hand was $2849. The restaurant purchased $5654 worth of inventory during the
accounting period. The value of inventory on hand on June 30 was $3,592. The average
inventory value during the accounting period was $1786. The owner has two main goals for the
rest of the fiscal year. The first goal is to make a profit of $2500 in the next financial period
(July 1, 2017 September 30, 2017). The second is to purchase a new beverage dispenser for
$900. The owner estimates that the new dispenser should provide $200 in profit per year. The
owner is currently preparing his operating budget for the next fiscal year (January 1, 2018
December 1, 2018). He is using the current income statement as the primary tool to prepare the
budget. See the attached balance sheet, income statement, and proposed budget to provide
further information to answer the following questions.
Questions

1. Assess the restaurants ability to pay their short term debt. What method did you
use to determine this and why? Show your work. Do you feel they are in a good
position to pay their short term debt? Explain your answer. 8 points

Short Term debt is termed as liquidity and can be found by using an acid test.

Acid Test= (Cash+Accounts Recievable + market securities)/(current liabilities)

=($10084 + $278 + $3951) / ($8545) = ($14313)/($8545)= $1.67:$1

Using acid test ratio, I was able to find the liquidity in a more specific way. This
restaurants ability to pay their short-term debt is very good seeing that they have a $1.67
to every $1 ratio. This ratio represents the idea that for every $1.67, the restaurant must
pay $1.00. The liability portion of their money is less than the assets portion of their
money which means that the debt of the business is less than the possessions of the
company that are available for use.

2. Assess the restaurants ability to pay their long term debt. What method did you
use to determine this and why? Show your work. Do you feel they are in a good
position to pay their long term debt? Explain your answer. 8 points

Long term debt is termed as solvency and can be found using the solvency ration
equation.

Solvency ratio= (total assets)/(total liabilities)

=($383.715)/($200.761)=$1.91:$1.00
**to find the total liabilities, you must subtract the owners equity**

The goal of solvency is a $1.50-$2.00 to $1.00 ratio and this restaurant is in this goal with
$1.91. This restaurant is in a good position to pay long term debt because for every $1.91,
the restaurant owes $1.00 leaving almost a whole dollar for credit. Similar to the short
term debt, the long term debt is less than the long term assets.

3. Calculate the payback period for the beverage dispenser. Do you feel that the
business is in the financial position to purchase the new beverage dispenser? 6
points

Payback period is calculated using the initial investment of the product/service and
expected yearly income that the product/service will bring.

Payback period= (initial investment)/(expected yearly income)

=$900/$200= 4.5
 Based on the previously calculated ability to pay long and short term debts, the business
is in the financial position to purchase the new beverage dispenser. The business is
bringing in more money than it has to spend so investing in a product that will only take
4.5 years to get the money back is something that this business has the wiggle room to
do.

4. What is the inventory turnover ratio for the restaurant? Show your work. How
would you assess the restaurants inventory management? Would you make any
changes to how inventory is purchased and maintained? Explain your answer. 10
points

Inventory turnover ratio is found using the cost of goods sold and average inventory
value. Cost of goods sold is found using inventory at beginning of pay period, inventory
purchased doing pay period, and inventory at end of period.

Cost of goods sold=(inventory at beginning of period + purchase during the period)

inventory at end of period
=($2849+$5654)=$8503-$3592= $4911

Inventory turnover ratio= (Cost of goods sold)/(average inventory value)

=($4911)/($1786)= 2.75

The goal for inventory turnover is 3-5 times a month which means that this business is
not turning over their inventory as quickly as they should be. The restaurants inventory
management is not being properly executed which is evidenced by the low turnover rate.
Changes that should be made are to buy less inventory during the pay period and use the
inventory that is available quicker. The restaurant would benefit by running an
assessment over their inventory to figure out what is getting used quickly or what is
getting used slowly and adjust either their menu or their inventory purchasing to fix the
turnover rate.

5. What level of sales (income) would the Waterfront Restaurant need to have to make
their desired profit? Given the information provided to you, do you think this is
feasible for the next financial period? Explain your answer. 10 points

Level of sales (income) needed to make a certain profit are calculated using the fixed
costs, profit desired, variable costs, and sales.

Sales or revenue level= (fixed costs + profit desired) / (1-(variable costs/sales))

=($4,395 + $2500) / (1-($10,867/$16,816)) = $41,124

Based on the income sheet given, the total income for the pay period of April 1, 2017-
June 30, 2017 the total income was only $16,816 before any type of expenses and only $1,010
after all expenses were accounted for. Given this information a goal of $41,124 seems to be very
difficult and almost unattainable. The sales/income would have greatly increase for the restaurant
to even come close to the desired profit.

6. Evaluate the attached budget. What is the primary flaw with the owners attached
budget? What is the first step the owner should take in revising next years budget?
What forms and additional information should the owner use to review next years
budget? Explain your answer. 8 points

The owners budget is missing all the steps except for step one of planning a budget. The
only data included in the budget are current expenses. There is no evaluating against
department goals, analyzing factors that affect future operations, and no set priorities to
make decisions. A good first step in revising would be to set certain goals for the future
based on the previous data. Additional information that could be useful would be other
businesss budget sheets, information about future factors that could affect operations,
and previous income statements.

Your grade will be determined on the thoroughness and effort that goes into your answers, as
well as how your answers relate to what you have learned in class regarding financial
management. You must step by step calculations used to determine your answers in order
to received full credit for your response. Do not forget to use your text as a resource! Please
bring a hard copy to class and upload your case study into the appropriate Assignments
section on TCU Online no later than 9:00 am on 4/24/2017!