Income Statement Analysis of Coles Pizza

Coles Pizza is a pizzeria located at Queensland offering dine-in, carry-out, and delivery pizza services. The pizzeria uses the information contained in the income statement to determine whether it made a profit or loss during the financial year. The revenue consists of sales of its various pizza varieties and drinks. On the other hand, the expense consist of salaries to the ten employees (6 in the kitchen, three delivery, and one manager), rent for the premises, advertising, and utilities (water, electricity, fuel). Other expenses could also include telephone bill, depreciation for the delivery van and equipment (oven), and taxes. It is crucial to point out that both past and present information is essential in matching the expenses to the revenues (ensure that they only relate to the financial year 2017). If the revenues exceed the expenses, the department has made a profit, but if expenses are greater than revenues, it is a loss.

Coles Pizza Inc.

Income Statement for year ended December 31st 2018

Revenue

Pizza (300 per day @7)

 $           766,500

Juice (300 per day @3)

 $           328,500

Total revenue

 $      1,095,000

less cost of sales (assume no opening and closing stock)

Pizza materials (($3.172 per pizza).

 $     347,334

Juice ($1 per juice)

 $     109,500

 $           456,834

Gross Profit

 $         638,166

less expenses

Salaries (10 employees @672.5per week, manager @1000 per week)

 $     370,800

Rent

 $       18,000

Depreciation of equipment (10%)

 $         2,500

Telephone and internet

 $         1,500

water

 $         4,000

Electricity

 $       11,000

Advertising

 $         2,000

Interest expense

 $           700

Fuel

 $         5,110

Total expenses

 $           415,610

Income before taxes

 $         222,556

Base-rate tax (27.5%)

 $             61,203

Income after tax

 $         161,353

1B

The research to review the reasons for the $161,000 profit would focus on the price, quality, and the customer request process. Coles Pizza offers a high-quality and diverse menu (10 pizza varieties and healthy juices), quick and efficient service, and the staff are well-trained to offer exceptional customer service. The unique service offering with a focus on quality, a wide menu offering, and quick service has enabled the company to attract and retain customers. Coles Pizza also has a reputation for competitive pricing; the business offers an affordable, high-quality service. Another successful aspect of Coles Pizza is the ease at which customers can order from home and get their order delivered within thirty minutes. With a functional website, customers can select their desired pizza and the drink, and the order is processed and delivered within thirty minutes. Therefore, it is a combination of the high-quality service and efficient operations that have contributed to the profits.

1C

For Coles Pizza, the business plan identifies the months of December and Valentine’s Day as critical dates regarding income generation and resource use. The month of December involves a lot of festivities (since it coincides with the Christmas holiday and New Year’s Day), and families and friends gather together to celebrate. It is a busy month and with the sales doubling this period, implying that the use of raw materials also doubles. On Valentine’s Day, the sales almost triple as couples visit the pizzeria to eat and drink.

1D

The business has been regularly purchasing wheat flour and tomatoes twice a week rather than the planned once a week. Such an increase in the expenditure drives this cash flow analysis. The analysis is carried out by comparing the budgeted and actual amounts for the wheat flour and tomatoes. The analysis shows that the expenditure on these two materials exceeds the target by $1,000 per week. Coles Pizza understands that cost efficiency is crucial in maintaining its competitive advantage, and this is an issue that warrants an inspection. For the wheat flour, the employees have been using excess amounts explaining the wastage of dough. In this case, monitoring will ensure that they only use 14 kg of wheat flour, which is the set standard. For the tomatoes, the kitchen staff is also not following the standards (1 tomato per pizza), and it is essential to ensure that they do not use excess materials.

1E

For the financial year 2017-18, the first applicable tax is the base-rate-entity company tax rate. It is essential to point out that the Australian Tax Office no longer recognises the small business entity tax, and as a result, Coles Pizza falls under the category of a base entity (turnover is less than the threshold of $25million). Therefore, Coles Pizza applies the lower 27.5% company tax rate.

The second tax applicable to Coles Pizza is the payroll tax. The business has ten employees, and one manager and the territory government applies a tax on their wages. The business is located at Queensland and in this state, the payroll tax is payable for wages that exceed $1.1 million annually (exceeds the threshold of $91,666 per month). Coles Pizza has an annual payroll of $370,800, and therefore, it does not pay the payroll tax (“Payroll tax thresholds | Business Queensland”, 2018).

The third applicable tax is the goods and service tax (GS&T) at the rate of 10% on most of the goods and items consumed in Australia. Coles Pizza has a monthly turnover of $91,250, and it meets the GST turnover threshold of $75,000 for the current and past 11 months. The restaurant services the business offers are taxable sales since it for payment of some kind connected with Australia and earned in the course of operating the business.

1F

Coles Pizza uses MYOB as its financial management software. MYOB is a popular software for small and medium businesses in Australia. It is easy to use since it provides a real-time view of the finances and a basic user can create invoices and pay bills, helping streamline and improve the management of cash. MYOB essential (the cloud version) is compatible with other software such as excel allowing Coles Pizza to import and export documents to their clients with ease. Also, it saves time during tax seasons since it automatically calculates the GST tax, a stressful process for a small business. However, in the future, it could become expensive to update and upgrade MYOB, and Coles Pizza might miss out on improved features.

Activity 2

A

Coles Pizza uses previous financial data to allocate cash for raw materials, salaries, and utilities. The delivery staff has complained that they are overwhelmed by a large number of online orders and over the past quarter month, customers have claimed that deliveries are taking longer than expected. Past financial data shows over the quarter shows that the number of deliveries has decreased by 10%, showing the need to allocate more resources to the delivery service. Coles Pizza should, therefore, will employ two-part time delivery people in the evenings (largest volume of orders) to improve the speed of the service.

B

A new item to add to the budget would be a mobile application to allow customers to order pizza and drinks from their mobile phones. It would help the people in offices around Queensland order a pizza and get delivery within thirty minutes. The cost of building the app and integrating it with the website (upfront cost) is $50,000. The ongoing costs include maintenance and upgrades at an annual cost of $5,000. Budgeting for the cost of $55,000 would require Coles to reduce the planned expenditure on advertising (billboard) and utilities such as water and electricity.

C

The first budget policy to adhere to is alignment to the departmental goals. Coles pursues the goal of a 5% increase in revenue, reduction in costs and wastage, and improvements in service delivery. As a result, the budget must align with these strategic goals, and the entity can provide realistic justifications for the amounts budgeted. The second policy is the semi-annual review where the department compares the actual performance to the budgeted performance. The requirements ensure that the staff is proactive in performing their duties. The third policy is compliance with the internal control policies, such as authorisation of the final budget figures by the manager.

Activity 3

A

Communication of the budget proposals is an essential organisational activity that allows for all managers to build consensus on the strategic plans to pursue (Marlowe, 2013). Prior communication with the managers via their e-mails is essential to inform them of the great need to review the budget proposal. Sending an e-mail with the new budgets is the most efficient means and also, encouraging the managers to give their feedback. It is crucial to note that most managers may have objections over some of the items and therefore, a one-hour meeting would help reveal deeper insights into the process. Therefore, circulation would involve the use of email and most importantly, a meeting to explain the clear lines of accountability on issues such as compliance with financial reporting requirements.

B

The first way is through vendor fraud. It involves creating false supplier accounts (fictitious suppliers), and the company ends up making payments for items not delivered to the wrong individuals. Resolving this requires the company to conduct a thorough review of their vendors by requiring information such as the tax identification numbers, physical business locations, as well as implement checks and balances on payments.

The second means is accounts payable fraud where the employees settle fictitious debts, and the solution is implementing checks and balances on accounts payable as well as monthly audit reviews. The third fraud is creating fake events by forging receipts, inflating claims, and duplicating expenses. Resolving expense fraud requires authorisation and original documentation for every expense as well as make every payment formally.

The fourth fraud is misappropriating the assets by stealing inventory, and resolving this requires keeping records of the movement in inventory. The fifth way is payroll fraud where the employees falsify overtime to increase their allowances and resolving this requires the company to implement a paper-based manual timesheet to manage the hours they work overtime.

C

Coles Pizza applies the accounts receivable aging summary to manage its receivables. The accounts receivable (A/R) aging report ”shows how much the customers owe the business at any point in time” (Guilding, 2012). The A/R report allows the company to understand the number of days a receivable is overdue, for instance, 30 days, 60 days, and over 90 days. Such information ensures that Coles Pizza can take steps to collect cash from its clients on time. For instance, if an invoice is due for 30 days, the company will make phone calls and send an employee to collect the debt. However, if it is due for over 90 days, the business can pursue legal action.

D

A possible contingency for Coles Pizza is the total breakdown of one of the delivery motorcycles, and the business either has to lease or buy a new one. The contingency results in lost delivery sales. Such an event was unexpected, and the budget requires a revision. Buying a new motorcycle is a significant investment, and as a result, Coles Pizza has to budget for the monthly lease payments on a second-hand motorcycle. Coles would have to revise its revenue estimate higher to provide extra financing for the motorcycle.

E

A discrepancy in Coles Pizza budget relates to the purchase of pineapples for the Hawaiian pizza. Pineapple only makes one pizza variety, but every week, the pizzeria is procuring pineapples (rather than every two weeks). An audit trail shows will show all the transactions relating to the procurement of pineapples. The first step is reviewing the reacquisition form to note the quantity requested.  The next step is to review the order form to note the purchase price. The net item is the supplier delivery receipt which shows the quantity supplied and the price. The next step is to review the receiving report to ensure that the quantity supplied is equal to the quantity received. The final step is verifying the payment details by analysing the check vouchers and the approval of the supplier.

F

The first area of compliance is safety standards. The office premises should have accessible fire extinguishers, protective gear for handling hazardous materials, and healthy safety policy for the staff. The second area is the effective management of labour, and it is essential to update the anti-discrimination laws and ensure access to equal opportunities for all employees. The third area relates to taxes, and it is essential to ensure that the filling of payroll, base rate, and GST taxes is on time to avoid penalties.

Activity 4

A

The primary report used in the workplace is a monthly budget report. The budget serves as a tool of comparing the budgeted usage of materials (wheat flour, cooking oil, sugar, salt, yeast, sauces, etc.) and utilities (electricity and water) with the actual amounts during the month. For a pizzeria, keeping food costs as low as possible is crucial to generating a higher profit. This budget contains a list of all the raw materials, their budgeted amounts during the month, and the actual usage per unit. It allows the pizzeria to conduct some variance analysis and identify strategies to reduce the cost of materials. The monthly budget below is based on 3600 pizzas during the month of June.  The table below shows the budgeted use and price of materials per pizza.

material

Quantity (grams)

Price per kg

Flour

200

0.50

sugar

15

075

salt

15

0.50

yeast

25

9

pizza sauce

80

5

olive oil

30

4.5/1 liter

mozzarella cheese

150

52

onions

25

0.9

Pizza box

1

800/500 boxes

Ham

50 grams

7.5/2kg

B

For priority attention in the workplace, bold red writing highlights all the significant issues. Such has been the practice over the last fifteen years, and by seeing this, the employees understand that it is a critical point to note. For instance, a significant issue is an increase in food costs, and the statements point this in the bold red writing.

C

A negative cash-flow is a sign that the pizzeria is not generating sufficient cash from its customers. It implies that the business might not have enough cash to finance its operations in the foreseeable future, for instance, has difficulties in procuring materials and paying the employees. On the other hand, a positive cash-flow is a sign of a financially viable business which can sustain its operations in the future.

A change in business activity such as a rise in popularity of the healthier gluten-free flour would reduce the customer demand for the pizzeria wheat flour made pizzas. The pizzeria would have to radically change its menu to keep up with the customer trend, and such a drastic move requires a substantial investment in equipment and change of suppliers. On the other hand, a change in activity favouring healthier fruit juices would make Coles Pizza, a favourite spot for health-conscious customers.

The business has taken three small loans with ANZ bank and seeking for consolidation (take a larger loan to pay off the three) is an indicator that the pizzeria is not generating sufficient income to meet the principal and interest payments. Also, a larger loan increases the financial risk of the company, and if the cash-flows do not improve, Coles will default on its loans.

Coles Pizza main expenses are rent and salaries while the overheads include electricity, water, and fuel. Keeping these items is essential to improve the income, but an increase in the cost of electricity and rent would put a strain on the pizzeria’s cash-flows. Therefore, if the expenses and overheads grow at a rate faster than the sales, the business will not generate sufficient cash to fund its operations.

Moving production to another location such as the State of Victoria would require hiring new employees and offering them training. An increase in labour costs would affect the ability of the pizzeria to meet its other expenses such as rent, and such a business is viable. The pizzeria would benefit if the wages in the new location are lower, allowing the business to incur fewer labour costs.

Losses mean that Coles Pizza does not generate sufficient sales to pay its expenses. Most loss-making business has cash-flow difficulties (since sales are not enough) and the risk of collapse is high. On the other hand, a profit shows that the pizzeria is financially viable and it can retain the earnings to open another pizza restaurant in Queensland. A write-off would comprise the damage of the pizzeria four delivery-motor-cycle. The effect would be a significant disruption in the delivery business, and the company would have to solicit extra funds to purchase new motorcycles.

D

The first element in evaluating the effectiveness of the financial management process is developing a criteria for analysis. The criteria would comprise factors such as accuracy and speed. Accuracy means a low error rate and the process captures information as entered. Speed means that the process provides information within the shortest time and when needed. An effective process is one that provides accurate financial information on a speedy and timely basis to facilitate effective decision making.

Communication with the staff would also show whether the process is effective. The staff would provide crucial information on the ease of use, reliability, and the ability to generate reports as well as identify and correct errors. The staff would do out weaknesses and suggest areas for improvement.

Assessment Task 2 Section A: Skills Activity

1

The first legal requirement to meet is paying taxes. As pointed out earlier, Coles has to pay the base entity and CGT tax. As a small business, the pizzeria is required to declare all their income (either electronic or cash) and file the returns before the deadline. Lodging a tax return requires the company to keep accurate records of its income and expenses, and it is essential to ascertain no falsification takes place.

The second legislative requirement is paying its liabilities such as the creditors and the bank loan. As pointed out earlier, the company has three loans with ANZ, and the loan statement is proof enough whether it makes the monthly principal and interest payments. For the creditors, the company’s bank statements will show whether payment is made to the suppliers at the agreed time periods.

As a restaurant, Coles Pizza is also subject to the Australian Food Safety Standards such as preventing food contamination, using approved materials, and also the hygiene of the premises (Australian Institute of Health, 2012). Using the Food Standards Code, it is possible to evaluate whether the organisation serves healthy and clean food in hygienic premises. Coles Pizza also has to comply with Queensland workplace laws dealing with issues such as compensation and employee health and safety. It is essential to review whether the organisation has put in place measures to safeguard the health of the employees as well as adherence to the compensation laws of Queensland. 

2.

As pointed out earlier, Coles Pizza uses the budget as the tool of analysis of factual and forecasted information. Using the sales, production, raw materials, and labour budget, the organisation can compare the actual monthly results with those in the budget. The purpose of this document is to provide a summary of the sales, production, raw material costs, and overhead expense for June.

For June 2018, the pizzeria sold 3,000 pizzas against a budget of 3,500 and 2,000 drinks against a budget of 2,500 units. The pizzeria prepares fresh pizzas every day, and therefore, the budgeted production was 3,500 pizzas and 2,500 drinks (no opening and closing stock). The actual performance has not met the budget, and this is partly due to a decline in the number of deliveries. The raw materials budget shows the standard amount of inputs (flour, sauces, cooking oil, and sugar, salt) to produce the target sales amount. Through careful usage and monitoring of inventory, the pizzeria has used a lower quantity (5% less) of materials. However, as a result of increasing inflation, the actual prices have been higher than the budgeted.

The labour budget segment compares the actual labour expense with the budgeted. For June, the workers were expected to work 45 hours per week but as a result of lower sales, the actual labour time decreased to 42 hours. As a result, the pizzeria’s labour expense for the month was lower. The final segment is the overhead budget showing the expected electricity cost. The actual electricity expense is lower by 5% because of a decline in the cost per unit and lower sales (leading to a decline in the use of baking and blending equipment).

3

I will demonstrate my oral communication skills by conducting a meeting a meeting with five other members. The agenda of the meeting is to identify cost management opportunities for the pizzeria by performing variance analysis.

4

I have used my numerical skills to perform a break-even analysis of a pizza restaurant. As a new business, it was offering only medium sized pizzas, and the owner wanted to know the number of units to sell to break even. The price of one pizza was $7, with the variable costs (raw materials costs, labour, and overheads) comprising 70% ($4.9) and a contribution margin of $2.1. The fixed costs were $1400 per month (rent).

The formula for break-even number of units is  667 units. It means that the pizzeria has to sell 667 units per month to cover its expense and start making a profit (Cafferky, 2010).

5

In my current role as financial analyst, I have to communicate with the chief financial officer on sales and expense forecasts after analyzing the economic and industry analysis. Such information is held in high confidentiality and as a result, I am bound by a confidentiality agreement. The organisational structure provides the reporting channels and in my role, I report directly to the CFO. Understanding all these requirements is essential in facilitating fast and effective communication within the organization.

6

An example of the oorganisations protocol for communicating with supervisors is providing a physical-hand copy for verification together with the soft copy (emailed copy). It is possible for the supervisors to give authorisation using only the email copy but they also require it to be accompanied with a soft copy. For instance, I will send an email asking the manager to authorise the procurement of materials, but the request will not be processed until a physical copy is present.

7

A new digital technology to manage and manipulate data is Qlickview which gives control to the user to visualise and manipulate data sets. The software has an inbuilt recommendation engine that providing the best advice on how to visualize a certain data set. It allows the user to explore trends and discover insights within the data.

Section B: knowledge Activity

1

Financial probity means that an organisation applies ethical behaviour in its financial affairs. It means that a company conducts its financial affairs with integrity, honesty, and uprightness. Such an organisation strictly adheres to the accounting standards and ensures that financial information is reliable and relevant to the decision makers. An ethical company does not manage its earnings by either overstating revenues or understating the expenses in an attempt to record a higher profit. Financial probity leads to financial statements that faithfully represent the affairs of a company; the investors can use the information to make useful economic decisions. Financial probity also means that a company is open and transparent in its financial affairs. It should declare all its sources of income and not seek to evade taxes by holding profits overseas or in offshore accounts. Integrity, therefore, means that a company truthfully files its income taxes. Financial probity also requires that individuals who hold office are ethical and can be trusted to keep accurate financial records.

2

The business entity concept means that a business is a separate and distinct unit from its owners as well as other business units. For instance, the financial activities of Coles Pizza are separate from those of the owners and most importantly, those of competitors such as Domino’s (Kimmel, Weygandt, & Kieso, 2015). The second concept is going concern which states a business will have a long life into the foreseeable future. Financial statements are prepared based on this concept; recognise assets and liabilities because the company will continue operating in the future (Kimmel et al., 2015).

The third concept monetary unit which states that the monetary unit is the means by which entities express changes in goods, services, and capital (Kimmel et al., 2015).. A monetary unit is appropriate because of its relevance, ease of understandability, and usefulness in a range of economic condition. It also follows that the entity used quantitative data (numbers) to communicate and make economic decisions (Kimmel et al., 2015). The third concept is accrual basis which requires a company to record transactions in the periods they occur. It requires an entity should recognise an expense once it incurs it rather than paid (Weil, Schipper, & Francis, 2013). Another concept is periodicity which subdivides the economic activity of an entity into artificial time periods such as yearly and quarterly. For publicly listed companies, the period is yearly, and the company releases its financial statements to the investors.

3

The Fair Work Act of 2009 governs the relationships between employees and employers (Creighton, 2011). The Act contains the conditions and terms of employment and clarifies the rights and responsibilities of employer, employees, and companies relating to the employment contract (Creighton & Foryth, 2012). Also, it specifies the national employment standards which cover issues such as working hours, parental leave, annual leave, and the statement of fair work.

The state of Queensland requires companies to comply with fair trading legislation. The legislation specifies consumer right such as privacy to information, the ability to make a complaint, and protection from discrimination (especially for disabled people).  For businesses, the legislation requires them to behave practice fair business practices such as providing accurate information on price and quality. Also, businesses should only make truthful claims about their services and products and avoid the use of unfair business tactics such as high-pressure tactics.

4

The Goods and Services Tax (GST) is levied on goods and services sold and or consumed in Australia at the rate of 10%. The first requirement for GST is determining whether the goods and services sold are taxable or GST free (”Goods and services tax (GST)”, 2018). A taxable sale is one that the customer makes being payment of some kind, earned in the normal business activities, and are within Australia. On the other hand, a GST free sale includes foods, education courses, and some medical services.  The second criteria for GST are monthly sales exceeding $75,000 (”Goods and services tax (GST)”, 2018)

The company tax rate applies to registered limited Australian companies, corporate unit trusts, and public trading trusts. The tax rate depends on whether a firm is a base rate entity (27.5%) and all others are the rate of 30%. For a base rate entity, the requirements are a turnover of less than $25 million. For all other companies with revenues exceeding $25 million, the tax rate is 30%.

The pay as you go (PAYG) is a system where the employer helps the employees meet their end of year tax liabilities by collecting PAYG withholding amounts (”PAYG payment summaries”, 2018). An employer must first confirm whether an individual is an employee (withhold amounts) or a contractor (do not withhold).  As a result, the first requirement for PAYG is an agreement with the employees. The employer must also confirm that PAYG is allowable under an employee’s registered agreement and most importantly, allowable by the fair work commission (”PAYG payment summaries”, 2018).

Section C: Performance Activity

1

The documents that contain previous financial data are last year’s budget reports, the profit and loss statement, receipt and expenditure, inventory sheets, and the cash-flow statement. The essential areas of profit and loss within the organisation are revenues, the cost of materials, and expenses. An analysis of the budget shows the target and actual sales, and for the past year, the actual sales ($10,000,000) exceeded the target by $1,000,000. The increase in sales is attributable to improvements in the quality of food served, fast service, and proper management of inventory to ensure that all meals are available.

The second critical item is the cost of materials. The inventory sheets show the rate of material usage while the expenditure and cash-flow statement the costs of all the materials used during the year. The third item is the expenses (salaries, rent, and utilities) and the profit and loss statement gives a comprehensive detail of the expenses incurred in the year. It is worth pointing out that the organisation made a profit of $500,000 (sales $10 million and expenses $9.5 million)

Such a detailed analysis of previous financial management shows that the profit is attributable to an increase in sales (that beat estimates), efficiency in operations, leading to faster and exceptional service, and a continued focus on cost management leading to affordable services. Also, efficient inventory management ensures that all the menu items are available (by keeping enough buffer stock to minimise shortage).

2

In the case of Coles Pizza, the previous profit and loss statement for the financial year 2017 shows a sales of $1.2 million and the cost of goods sold at $800,000. The ten employees receive a minimum wage of $672.5 per week and the manager $1,000 per week. The advertising expense is $2,000 for the year. The electricity cost per month is $400, water $200, and fuel $150.

From this profit and loss statement, Coles Pizza can prepare for the financial year 2018/19. The manager believes that as a result of improved economic conditions and an expansion of the menu, the sales will increase by 10%. Through efficient cost management measures, the corresponding increase in the cost of materials is 5%. The salaries are to remain constant while the expense for utilities is to increase by 5%.

3

The organisation was developing a mobile application to enable customers to make orders online. As a member of the project committee, I was responsible for preparing a financial estimate of the mobile application development. The key aspects in the development process is an app that supports both Android and Apple OS operating system (Flora, Wang, & Chande, 2014). The second aspect is allowing the customer to log in either using email or social media sites such as Facebook or Twitter. The third aspect is allowing the customer to review the quality of the food delivered, ensuring that the app is has integration with the website (application programming interface), and then developing a nice application icon (Flora et al., 2014). By talking to a mobile application developer, the financial estimate of developing an app with all those aspects was $81,000.

4

Fresh cleaners provide cleaning services for offices and commercial properties such as malls and supermarkets. For the financial year 2018, the organisation has budget sales of $129,5