Financial Statements Paper Part Two The financial condition of a company as reported in the company’s financial statements for a period gives company management the information needed to make vital business decisions including the decision to expand in nature or how to determine industry trends in nature by using a trend analysis. In this paper, I will discuss Landry’s Restaurants management assessments of the financial condition and explain whether or not those assessments agree with my previous assessments supported by a trend analysis.
I will also discuss management’s concerns and identify and recommend a course of action for weaknesses not discussed by management. Does managements’ assessment of the financial condition agree with your assessment from the Financial Statements Paper Part I? Explain. Support your answer using trend analysis, vertical analysis, or ratio analysis. Landry’s Restaurants management assessment of the company’s financial condition very much agrees with my initial assessment as reported in the Financial Statements Paper Part I.
I stated in my previous paper that management would need to know how much profit the company made to use as a basis in determining whether or not to expand the company. Landry’s management assessment reported the company acquired several restaurants. Making the decision to acquire many restaurants during the reporting period had to be made based on revenue and profit after expenses or net income. Debt would also be considered a factor when making the decision of whether or not to acquire additional restaurants. A company will high debt will not be able to acquire necessary credit in order to expand.
In addition to financial statement information, management must have also reviewed the balance sheet to determine if the financial well-being of the company could sustain the acquisitions of new restaurants. The balance sheet would also tell management if the debt to acquire additional restaurants was feasible without making the company highly leveraged. Management’s assessment of the balance sheet must have determined the debt would be repayable and would not result in making the company vulnerable because the acquisitions were made.
By taking a trend analysis, one can calculate the percentage of a change in one or several accounts. The trend analysis will then help the reader to predict what might happen in the future for a company based on what has happened. A trend analysis of Landry’s Restaurants income statement reveals the following: revenues have increased by 23. 6%, cost of revenues has increased by 24. 8%, interest expense has increased by 91. 4%, and net income has increased by 10. 6%.
The results of this analysis indicates a potential warning sign as a result of the cost of revenues increasing as a percentage slightly more than the actual increase as a percentage in revenues. However, the actual net income amount also increased, which indicates that Landry’s Restaurants will probably continue to produce a net income in the future. In the Annual Report, there are several concerns from management. Discuss these concerns and identify other weaknesses not discussed by management. Then, recommend a course of action addressing these concerns.
Management of Landry’s Restaurants reported concerns of the competitive nature of the restaurant market, which is affected by several factors including customer taste, economical conditions, and demographical trends. An additional concern related to the possible impact of traffic, marketing, weather conditions and competing restaurants. The competing restaurants are already well established with great financial resources. Management is looking into acquiring the competing restaurants as a remedy to the competitive market issues.
Another concern of management was the increase in restaurant labor cost that was contributed to inefficiencies during the openings of the new restaurants. Management should look into these inefficiencies to ensure future acquisition openings run smoother and more efficiently, which would keep the restaurant labor cost to a minimum. $13,100,000 in asset impairment expense was due to six underperforming restaurants in addition to three closed restaurants. Management needs to keep close watch on any underperforming restaurant to prevent unnecessary asset impairment expense.
Management did not mention any concern of possible tax increases due in part to a tax reduction and instead projects the reduction of valuation allowance. In light of the company’s future endeavor plans, a projection of a tax increase should be accounted for to ensure the company is able to pay the incurred taxes. Management has many plans to acquire additional restaurants but does not have any plans of selling possible underperforming restaurants. This could result in the company becoming highly leveraged, which would reduce stock value and make creditors think twice about extending credit to the company.
Management is not at all concerned about inflation as the company will just pass the increased cost onto customers. However, there is no mention of possible economic hardships or a plan for such, which would greatly reduce the amount of consumers and the company’s revenue. Management should think about establishing a cash cushion for any potential economic downturns instead of acquiring so many additional restaurants, which may end up having to be closed in the future. Conclusion Management’s assessment of the financial condition agrees with my earlier assessment.
With the continued increase in revenue, the company is able to acquire more restaurants and further increase revenue. From the information given on the financial statements, management was able to determine the possibility of future acquisitions and identify concerns relating to expenses and debt. For each of the reported concerns management had, a course of action to remedy those concerns were also given. Management did not address the possibility of over leveraging the company, which will bring down the company’s stock value and should be watched closely.