Quick Lunch

A Study Submitted to the Faculty of College of Business and Accountancy

In Fulfilment of the First Case Study in
Management Accounting

Felix Cena, CPA, MBA

Professor, MANACC330
University of Negros Occidental-Recoletos

Demetillo, Angel
Emnace, Cheveem Grace C.
Nepomuceno, Jenica Chloe P.
Proponents, CO8

UNIVERSITY OF NEGROS OCCIDENTAL-RECOLETOS

Bacolod City, Negros Occidental
Western Visayas - Region VI

August 25, 2021

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 BACKGROUND OF THE CASE

Quick Lunch is a lunch counter located in Fisher’s Department Store. Mr. Bingham, a
short-order cook in a small family-owned restaurant became dissatisfied with his job for he was
only earning an amount of $9.75 per hour. Due to this dissatisfaction, Mr. Bingham, together with
his wife, founded the Quick Lunch on July 2002, a business that ought to be what they really
wanted. Quick Lunch operated under a lease in the said Department Store and under that lease
term, the Bingham’s should pay 15% of the gross receipts to Fisher as a rent. The only possession
that the operator owned was the equipment, which Mr. Bingham thought to be in good condition.
Eventually, the spouses negotiated with the previous owner of the Quick Lunch and they took over
the business on September 2002.

The Bingham’s started to operate with an original capital of $15,450. Of this amount,
10,300 was from their personal savings account which they paid to the previous operator for the
lease and the equipment with a fair value of $4,600. The Bingham’s then transferred an amount of
5,150 to a checking account of Quick Lunch. As the Bingham’s started to operate, the equipment
started to break down thus, making them decide to sell it off for a lower price and purchase new
ones.

As the Quick Lunch continue to operate, Mr. Bingham called in a firm which specializes
in making reports on small business like what they owned. Mr. Bingham requested for financial
statements for the period ended, December 31, 2002. Mr. Bingham explained everything to the
accountant and cash registers and checkbooks were used to identify the cash flows of money from
their business. The accountants then do as what Mr. Bingham requested and had their findings and
comments with regards to the business.

The checkbooks and cash register showed the following cash receipts and disbursements:

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Table. 1 Cash receipts and disbursements

Cash Receipts
Cash receipts from customer $33,165
Sale of cooking range 400
Total Cash Receipts $33,565
Cash Disbursements
Food and Supplies $14,275
City restaurant license, valid September 1, 2002 to August 31, 2003 225
15% rent paid to Fisher for September, October, and November 3,460
New cooking range 4,000
Installation of cooking range 600
Other operating expenses 90
Withdrawals for personal use 3,800
Total Cash Disbursements $26,450

POINT OF VIEW

The case focuses on the financial status of the business. The proponents aim to help Mr.
Bingham about the financial decisions. Early in 2003, the Bingham’s called in an accountant to
make reports and financial statements for Quick Lunch, and also to comment on the significant
information revealed in the financial statements. Thus, this point of view will be analyzing all
aspects in the financial information from the perspective of the accountant.

STATEMENT OF THE PROBLEM

Generally, the study aims to determine what do the financial statements reveal about Quick
Lunch.

Specifically, it aims to answer the following questions:

1. What is the current financial performance of Quick Lunch;

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2. What should be the treatment of the coupon books;

3. What is the current financial position; and

4. What could be said about the cash inflows and outflows of the business?

AREAS OF CONSIDERATION

1. Mr. Bingham’s Job and Salary

2. Economic Factors
3. Current Standing of Quick Lunch
4. Coupon Books
5. Market Structure

Mr. Bingham’s Job and Salary

Richard Bingham was a short-order cook a in small family-owned restaurant wherein he

earns $9.75 an hour. A short- order cook is someone who typically prepare quickly-made foods
and works on many meals at one time. According to Burkhard Bilger (2005), “Saturday morning
is zero hour for short-order cooks. The café, which prepares some twenty-five hundred meals on
an average weekday, may serve an extra thousand on weekends, with the same cooks.”. The classic
short-order career began in the army or the navy, where kids who had never cooked were suddenly
ordered to feed thousands. The military taught speed, volume, sanitation, and the rudiments of
American comfort food, and the best cooks carried their skills into civilian life. Furthermore, 35%
of all short-order cooks are women and the remaining 65% belongs to men. On the other hand, the
average age of an employed cook is 37 years and are paid $25,326 average annual salary (Zippia,
2021).

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Table 2. Mr. Bingham’s Salary Rate

Yearly $9.75 an hour is $20,268 per year

Monthly $9.75 an hour is $1,689 per month
Biweekly $9.75 an hour is $780 per 2 weeks
Weekly $9.75 an hour is $390 per week
Daily $9.75 an hour is $78 per day

The table above shows the salary rate of Mr. Bingham while working at the said restaurant.
Assuming that he works for 8 hours a day at 40 hours a week, Mr. Bingham has earned a total of
$20,268 pre-taxed income annually.

Table 3. Mr. Bingham’s After-Tax Salary

Yearly After-Tax Salary $17,262

Monthly After-Tax Salary $1,438

On the other hand, Table 3 depicts the yearly and monthly after-tax salary of Mr. Bingham.
These amounts represent his yearly and monthly salary after paying off his taxes, and these are the
remaining amount of money Mr. Bingham has for their daily living. In short, if Mr. Bingham make
$20,268 a year living, he will be taxed $3,006. That means that his net pay will be $17,262 per
year, or $1,438 per month.

Economic Factors

Every business is affected by a myriad of factors. Economic factors affecting business

include all important trends in the economy that can help or hinder the company in achieving its
objectives and financial goals. Some of these includes consumer confidence, economic growth and
development, interest rates and inflation and overall economic indicators.

Understanding how such factors affect business is essential to making smart decisions and
guiding the company to greater heights. In the case of Quick Lunch as an entrant to the market,

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the above-mentioned factors may give a positive or negative impact to the business. Although, it
is not in direct-relation but it may influence the plan of further expanding the business or future
investments.

Current Standing of Quick Lunch

Table 3. Quick Lunch’s Financial Position

Quick Lunch
Statement of Financial Position
For the Four-Months Ended December 31, 2002

ASSETS
Current Assets
Cash $12,265
Food and Supplies Inventory 750
Prepaid License 150
Total Current Assets $13,165
Non-current Assets
Equipment $8,800
Less: Accumulated Depreciation 480 8,320
Leasehold 3,800
Total Non-Current Assets $12,120
Total Assets $25,285

LIABILITIES AND OWNER’S EQUITY

Current Liabilities
Accounts Payable $890
Accrued Rent Payable 1,515
Deferred Sales Revenue 1,375
Total Liabilities $3,780
Owner’s Equity
Bingham’s Capital 15,450
Addition from Operations 6,055
Total Owner’s Equity $21,505
Total Liabilities and Owner’s Equity $25,285

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Table 4. Quick’s Lunch Financial Performance

Quick Lunch
Income Statement
For the Four-Months Ended
December 31,2002

REVENUE
Cash Sales $ 29,315.00
Coupons Earned from Meals $ 2,700.00
Less: Coupons Discount 225.00 2,475.00
Net Sales $ 31,790.00
Cost of Sales:
Food and Supplies 14,275.00
Meat Bill 140.00 14,415.00
Gross Profit $ 17,375.00

OPERATING EXPENSES
Rent Expense $ 4,975.00
Amortization of Leasehold 1,900.00
Other Operating Expenses 90.00
Depreciation expense 480.00
License Fee 75.00
Total Operating Expenses $ 7,520.00

Net Income $ 9,855.00

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Table 5. Inflows and Outflows of Cash

Quick Lunch
Statement of Cash Flows
For the Four-Months Ended
December 31,2002

INDIRECT METHOD

Cash Flow from Operating Activities

Net Income $ 9,855.00

Amortization of Leasehold 1,900.00

Depreciation 480.00

Changes in Current Assets and Liabilities:

Increase in Food and Supplies (750.00)

Increase in Prepaid License Fee (150.00)

Increase in Accrued Rent Payable 1,515.00

Increase in Coupons Payable 1,375.00

Increase in Accrued Meat Bill 890.00

Net Cash Provided (Used) From Operating Activities $ 15,115.00

Cash Flow from Investing Activities

Additions to Property, Plant, and Equipment $ (4,600.00)

Proceeds from Disposal of Old Cooking Range 400.00

Net Cash Provided (Used) From Investing Activities $ (4,200.00)

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 Cash Flow from Financing Activities

Personal Withdrawals (3,800.00)

Net Cash Provided (Used) From Financing Activities $ (3,800.00)

Summary

Net Increase (Decrease in Cash) $ 7,115.00

Cash, Beginning Balance 5,150.00

Cash, Ending Balance $ 12,265.00

The following tables above shows the respective financial report of the Quick Lunch for
the four-months ending December 31,2002. Although the business has only been around for almost
a year, it shows a positive cash flows which means that a Quick Lunch’s liquid assets are
increasing, enabling it to cover obligations, pay expenses, and provide a buffer against future
financial challenges. However, it having positive cash flows does not mean the business is safe. In
some instances, positive cash flows can mean a business is in grave trouble. In addition, due to
coupons offered by Quick Lunch it generated profit from consumers using the said discount. Assets
may look good on the report, but truthfully some of the Quick Lunch’s equipment are prone to
breakdown time and may affect the business’s profit due to higher costs of maintenance and repairs
if not mended. All in all, the operations of the business are somehow good for a starter pack
business but having a right and new asset could elevate the efficiency of the operations and services
which in result may or may not increase profit plus attracting loyal customers, vis-à-vis.

Financial Ratio Analysis

Financial ratios help the business what step the business needs to make. It is a effective
way to evaluate the financial results of your business to gauge performance. These ratios assist in
understanding the financial statements of your business. They identify certain trends over time and
can be one measure for analyzing the financial state of your business. Below are the financial ratios
of Quick Lunch and analysis on how it is related to the business:

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 A. Gross Profit Margin

Gross Profit Margin = (Gross Profit)/ Sales = (31, 790-14)/ 415 = .5565 or 55.65%

- The business can still have 50% of its sales be utilized and can generate more profit
considering that it’s just 4 months.
B. Liquidity Ratio

Liquidity Ratio = Total Current Assets/ Current Liabilities = 13,165/ 3,780 = 3.48

- This indicates that the business can cover its current liabilities 3.48 times using their current
assets.
C. Debt/Equity Ratio

Debt to Equity Ratio = Total Liabilities / Shareholder’s Equity = 3,780 / 21,505 = 0.1758 or 0.18

- The Quick Lunch has $0.18 of debt in every $1 in equity, this indicates less debts that
equity which is a good sign, the business is less risky.
D. Equity/Debt Ratio

Equity to Debt Ratio = Shareholder’s Equity / Total Liabilities = 21,505 / 3,780 = 5.6891 or 5.69

- 5.69 of the company’s assets are owned by Quick Lunch and not creditors.

Coupon Books

Many organizations have their own set of strategies to attract customers as well as building
brand value. Offering coupons is a way to market products and engage consumers. Coupons can
entice customers to build loyalty with a specific company or product. Coupons also serve as a way
of getting rid unwanted inventory to reduce higher cost of maintenance and giving more room to
store for newer products offered by the business. Furthermore, these are redeemable by a merchant
or several designated merchants and includes, such things as dining or entertainment discount
clubs. Quick Lunch also offers coupons that is used to pay for meals purchased or ordered by
customers. Coupons can be considered as a sort of a discount.

Subsequently, the aforementioned computations are as follows:

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Table 6. Coupons Earned

Coupon Books 140

Cost $27.50

Face Value 30
$4,200
Total Coupons 140 x $30

Total Coupons earned 90 x $30 $2,700

$1,375
Outstanding Coupons 50 x $27.50

Market Structure

There are different types of competitions in a market. For each there is a specific
qualification as to what market a business or organization is in to. A monopolistic competition best
defines what competitions Quick Lunch belongs to. Monopolistic Competition is a market
structure characterized by a differentiated product and freedom of entry and exit. In characteristic
it is an industry in which many firms offer products or services that are similar, but not perfect
substitutes. Quick Lunch is new to the food and services industry means that Mr. and Mrs.
Bingham will have a hard time increasing and generating profits. Especially that the spouses
decided to operate their lunch store in Fisher’s Department, they will be surrounded by many
competitors. Thus, Quick Lunch must find ways for the business to be at par with other business.

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 ALTERNATIVE COURSES OF ACTION

1. Opted to obtain capital of Quick Lunch through Venture Debt

2. Improve their Financial Standing through Cost Cutting

Opted to Obtain Capital of Quick Lunch through Venture Debt

When starting a business, your first investor should be yourself; either with your own cash
or with collateral on your assets. This proves to investors and bankers that you have a long-term
commitment to your project and that you are ready to take risks. A lot of entrepreneurs started
putting up business mostly using their own capital, which means, this capital came from their own
pockets or bank accounts. In financing a business, there are two types of financing that is widely
known: Equity and Debt Financing.

Debt and Equity financing also have its own similarities and differences. Debt financing
revolves around borrowing money from an outside source promising to pay it back with interest.
On the other hand, Equity financing, a company is selling a portion or a share of ownership in
exchange for the money and assets invested.

Under this arrangement, the couple (Bingham) will be acquiring funds, specifically a
venture debt. Through this proposal, they would be able to secure assets such as equipment’s to
further enhance the business’s operation. In addition, this type of debt is very appealing to business
who are just starting up and has not much of an asset, since it does not really require for a collateral
on its debt.

Assumptions

The following assumptions are set forth in preparation for the alternative course of action
one (ACA 1):

• The additional capital needed by Quick Lunch is $15,000 with which is offered at
minimum by lenders specifically banks to starting up businesses.
• Annual interest 11%, included the other fees (e.g. equity kicker, warrants and etc.)

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 • In projecting the revenues, provision for income tax is 24% according to Small
Business Administration
• Projected increase in revenues by 10%;

Table 7. Forecasted Income Statement and Balance Sheet

Quick Lunch
Projected Income Statement

Current (0%) Increase (10%)

Sales $ 31,790.00 $ 34,969.00
Cost of Goods Sold 14,415.00 15,857.00
Gross Profit 17,375.00 19,112.00
Selling and Admin. Expenses 7,040.00 7,744.00
Depreciation 480.00 528.00
EBIT 9,855.00 10,840.00
Interest - 1,650.00
EBT 9,855.00 9,190.00
Tax (24%) 2,365.00 1,281.00
Net Income $ 7,490.00 $ 7,909.00

Quick Lunch
Projected Balance Sheet

Total Assets $ 25,285.00 $ 40,285.00

Current Liabilities 3,780.00 3,780.00

Debt - 15,000.00
Equity 21,505.00 21,505.00
Total Liabilities and Equity $ 25,285.00 $ 40,285.00

The table above shows the projected financial report if the Bingham’s opt to finance their
business through venture debt. Currently, Quick Lunch has a return on equity of 34.83% and
increases by 1.95% as the proponents projected an increase of 10% in its revenue. Return on equity
is a measure of management's ability to generate income from the equity available to it. Since that
Quick Lunch choses to go to venture debt, it may or may not benefit the lender but as per stipulated

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in the assumptions, included in the interest rate is an equity kicker which incentivize lenders to
provide funding at a lower interest rate. In exchange, these financiers receive an equity position in
the borrower's company via common stock, warrants, or a share of the revenue. Nevertheless, a
higher ROE is usually better while a falling ROE may indicate a less efficient usage of equity
capital. However, a ROE that’s greater than the return available from a lower risk investment
motivates the Investor to see interesting but false prospects building within the company (Goyal,
Mehul 2020).

Improve their Financial Standing through Cost Cutting

Cost cutting is a strategy used by a company to reduce their expenses, and improve
profitability. In this case, Quick Lunch could use this strategy and the cost cutting measure that
they can apply include reducing supply expenses, cutting production costs, reducing their utility
costs, or even moving to a less expensive building or area. As mentioned earlier, cost cutting helps
increase revenues. By reducing the company’s expenses, the net profit and the profit margin will
increase. However, there are also risks involved with regards to this strategy. This strategy will
help increase the profitability only if the sales price and the number of sales will remain constant.
Cost cutting could probably result to lowering of a company’s product thus, resulting to reduced
sales.

Akeem stated in her research about the Effect of Cost Control and Cost Reduction Techniques in
Organizational Performance, “the term cost reduction denotes real or genuine saving in production,
administration, selling and sharing costs resulting to the elimination of wasteful and inessential
elements from the design of the product and from the techniques and practices carried out in
connection therewith. The necessity for cost reduction arises when the profit margin has to be
increased an increase in the sales turnover i.e. for the same volume of sales, the cost should be
reduced”.

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 CONCLUSION AND RECOMMENDATION

After analyzing the current financial statements of the Quick Lunch, the proponents
conclude that the financial performance of Quick Lunch is doing average, since the business is just
starting they have not yet encounter big problems that can cause financial struggles, they still able
to have an average net income of $9,855 which is more that the salary of Bingham for 17 weeks
that is $6,630 since he gets $390 per week.

However, the income of the venture does not allow anything for Mrs. Bingham’s services
or for a return on the $15,450 investment. On the other hand, the business is just getting started,
and the stated profit is conservative because of the large write-off of fixed asset. Moreover, the
proponents went over about the equipment’s they are using and how it broke that cause them
money to fix or change it, the proponents analyzed that instead of spending too much about the
second hand equipment’s, it is better to invest in something more durable. About the coupon books,
it is a good idea to promote and advertise the business since it entices customers to build loyalty
with the company.

To maintain and improve the performance of the business, the proponents recommend to
obtain capital through Venture Debt. Since Mr. Bingham started the business with their personal
money, the proponents suggest that they borrow money from an outside source promising to pay
it back with interest. Under this arrangement, the couple will be acquiring funds, specifically a
venture debt. Through this proposal, they would be able to secure assets such as equipment’s to
further enhance the business’s operation. In addition, cost cutting is also advised by the proponents,
reducing supply expenses, cutting production costs, reducing their utility costs, or even moving to
a less expensive building or area. Cost cutting helps increase revenues, by reducing the company’s
expenses, the net profit and the profit margin will increase. However, there are also risks involved
with regards to this strategy. This strategy will help increase the profitability only if the sales price
and the number of sales will remain constant. Cost cutting could probably result to lowering of a
company’s product thus, resulting to reduced sales.

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REFERENCES

C. (2021, June 22). Financing Options Available to Startups. Defmacro Software Pvt. Ltd.
Copyright (c) 2016. https://cleartax.in/s/financing-options-available-to-startups
Goyal, M. (2021, February 20). A High ROE can be Misleading! The Pangean.
https://thepangean.com/A-High-ROE-can-be-Misleading
FreshBooks. (2021, August 20). How Much Tax Do Small Businesses Pay? A Simple Guide |
FreshBooks Resource Hub. https://www.freshbooks.com/hub/accounting/how-much-do-
small-businesses-pay-taxes
Hopkinson, R. (2021, March 31). What is Venture Debt? Demystifying For SMEs. BOOST&Co.
https://boostandco.com/venture-debt-explained/

Short order Cook demographics and Statistics [2021]: Number of short order cooks in The US.
Short Order Cook Demographics and Statistics [2021]: Number Of Short Order Cooks In
The US. (2021, April 30). https://www.zippia.com/short-order-cook-jobs/demographics/.

The real reasons why you should consider venture debt. Withersworldwide. (n.d.).
https://www.withersworldwide.com/en-gb/insight/the-real-reasons-why-you-should-
consider-venture-debt.

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