QS

MODULE TASK

Riley Pizzeria is a solely-owned pizza parlor operating within the locality. The
proprietor, Ms. Gianne, is thinking of selling the business as her family will be moving to
another country for good. Your family is contemplating on buying the business. However, some
members of the family are hesitant since the cost of capital is quite huge. Being a Business
Administration student, you were then tasked by the family to do an evaluation whether it
would be a good idea to buy the existing pizzeria.

The financial data of Riley Pizzeria is presented below as provided by the owner (all
Balance Sheet accounts are average balances and Riley Pizzeria uses a 360-day in a year in its
accounting computations).

Sales (20% cash, P 3,300,000 Accumulated 1,230,000

80% credit) depreciation

Cost of sales 1,980,000 Accounts payable 550,000

Selling expenses 650,000 Mortgage payable- 500,000
long term
Depreciation 230,000 Accrued expenses 50,000
expense
Interest expense 80,000 Notes payable long- 160,000
term
Taxes 140,000 Riley, Capital 1,490,000
(ending balance)
Cash 120,000
Accounts receivable 510,000
Inventory P 640,000
Prepaid expenses 30,000
Fixed assets 2,680,000

Requirement: Prepare a financial statement analysis, including your recommendation whether

to buy or not Riley Pizzeria. Please follow the format presented.

Reminders:

 You first have to prepare Riley’s Income Statement and Balance Sheet following the
correct format.
 Data in the “Actual’ column needs to be computed based on the information presented
above
 Round off your computed ratios to the nearest two decimal places and label
appropriately (percentage, days or number of times).
 Content of the financial statement analysis would be as follows

Income Statement

Balance Sheet

Financial Statement Analysis report (see format below)

Recommendation
A. Income Statement (20 points)

Riley Pizzeria
Income Statement

Sales 3, 300, 000

Cost of sales (1, 980, 000)
Gross Profit 1, 320, 000

Operating expenses
Selling expenses 650, 000
Depreciation Expense 230, 000 (880, 000)
Operating Profit (before Interest & Taxes) 440, 000
Interest Expense 80, 000 (80, 000)
Net Profit before Taxes 360, 000
Income Taxes (140, 000)
Net Profit after Taxes 220, 000

B. Balance Sheet (20 points)

Riley Pizzeria
Balance Sheet

Cash 120, 000

Account Receivable 510, 000
Prepaid Expense 30, 000
Inventory 640, 000
Total current assets 1, 300, 000

Fixed Assets 2, 680, 000

Accumulated Depreciation (1, 230, 000)
Total Non-Current Asset 1, 450, 000

TOTAL ASSETS 2, 750, 000

Accounts Payable 550, 000

Accrued Expenses 50, 000
Total Current Liability 600, 000

Mortgage payable long-term 500, 000

Notes Payable Long-Term 160, 000
Total Non-Current Liability 660, 000

TOTAL LIABILITY 1, 260, 000

Riley, Capital 1, 270, 000

Net Profit 220, 000
Total Owner’s Equity 1, 490, 000

TOTAL LIABILITIES & OWNER’S EQUITY 2, 750, 000

 Financial Statement Analysis Report (30 points)

Riley Pizzeria
Financial Statement Analysis

Ratio Actual Industry standards Interpretation Analysis

Current ratio 2.17 1.50 or 1 Riley Pizzeria have a 2.17
current ratio which is the
current ratio is above the
standard which means that
for every peso of current
liability there is 2.17 peso of
current assets that can be
allocated for.
Quick ratio 1.05 1.0 Riley Pizzeria have 1.05 ratio
which means that its more
rigid test of business ability to
pay its current obligation. It
means that there are 1.05
assets readily available to pay
every peso of liability.
Accounts receivable 5.18 times 5 times The Accounts Receivable
turnover Turnover is above the
standard which means that
the company have a good
credit and collection.
Average collection 70.46 days 75 days It takes 70.46 days for Riley
period Pizzeria to collect its
receivable, it means that the
business collection is efficient
and is favorable.
Inventory turn-over 3.09 2.5 times The inventory turnover is
above the standard which
means that the business has
liquid inventory. They are
able to sell more inventory
within the normal operating
sales.
Total Assets Turn- 1.2 1 or once The asset turnover is 1.2
over which means that the
business is more efficient and
effective in utilizing their
assets to generate sales.

Fixed Assets 2.28 2 times It shows that the business is

Turn-over efficient in utilizing their
fixed asset in generating
sales.

Gross profit margin 40% 35% It has high gross profit

margin; it means that the
higher gross ratio indicates a
higher capacity of the
business to earn more profit.
Return on assets 8% 7% It signifies that the business
gets an 8% return on every
asset it owns. It represents
Riley Pizzeria's productivity
in terms of producing sales
from their entire assets.
Return on equity 17.32% 12% The business produces
17.32% of its sales from its net
assets, indicating a strong
financial performance.

Times interest 5.5 times 4 times The company pays its

earned periodic interest expenses 5.5
times throughout a normal
operational cycle, indicating
that they can easily satisfy
their obligations when it
comes due.
Debt ratio 45.81% 44% 45.81% of Riley Pizzeria's
assets are funded by debt. It
means that the business is
riskier to invest in and
provide loans to.

Recommendation (20 points). Present your 2-3 paragraph recommendation (whether to

buy or not Riley Pizzeria) based on the financial statement analysis report you
prepared.

As a Business Administration student, I analyzed and studied Riley Pizzeria's

financial statements. For me, there is opportunity for growth in the business, and I
would recommend buying Riley Pizzeria at such a time. I would suggest Riley Pizzeria
to anybody (particularly new entrepreneurs) since its Financial Statement Analysis
reveals that the firm performs well in several areas during its normal operating cycle.
Riley Pizzeria is a great place to establish a company since it gives so many benefits,
profitability and growth are both important and essential for a company to thrive and
stay relevant to investors and analysts in order to be successful and remain in business.
Riley Pizzeria's liquidity ratio shows that it can pay its present obligations with its
existing assets, but it still has to be improved because the higher the liquidity ratio, the
better for the business.
Furthermore, owning the Pizzeria will result in good profits, which is
necessary for a business that seeks to grow its operations. Merely in terms of the activity
ratio, the turnovers are sufficient for the business; it only has to be effectively managed
to be more efficient and beneficial to the company. The equity ratio shows that Riley
Pizzeria is able to utilize and optimize their assets to the point of creating more
revenues, and it, like the activity ratio, should be maintained since the greater the
equity ratio, the better the sales flow for the business. However, when it comes to
leverage ratio, there is a large debt ratio, which may expose the company to investment
and lending risk.
 Finally, buying the pizzeria will provide several benefits and a far larger
probability of success. It is a successful business, but it must be improved in order for
more investors and customers to get interested, leading in a greater chance of success
and much higher earnings. Overall, having Riley Pizzeria as your business will not be
tough because it merely requires improvement, simply a growth that leads in the firm
getting larger in terms of size, markets, product offering, income, and profitability.