Question

Prestige Worldwide - Trial balance as of December 31, 2018:

Gross Service Revenue	$                      115,981,250
Bad Debt Expense	$                       2,655,000
Discounts on Sales	$                      (3,575,000)
Salaries	$                       55,825,000
Benefits	$                         14,178,292
Administrative	$                          4,342,500
Insurance	$                             325,000
Interest	$                             164,575
Depreciation	$                          3,200,000
Maintenance	$                             435,500
Purchased Services	$                          6,146,500
Rent	$                          2,240,000
Supplies	$                          9,169,813
Utilities-Electricity	$                             356,000
Cash and Cash Equivalents	$                          9,545,000
Short-term Investments	$                          2,750,000
Net Accounts Receivables	$                          7,125,000
Inventory - Supplies	$                          1,135,000
Property and Equipment	$                       90,500,000
Accumulated Depreciation	$                      (43,500,000)
Investment Income	$                                94,500
Account Payable	$                          2,375,000
Accrued Expenses	$                          9,125,000
Notes Payable	$                       16,515,000
Contributions Received by Prestige	$                          1,000,000
Long-Term Debt	$                       26,500,000
Retained Earnings	$                       13,040,000

Net revenues will reflect on Financial Statements what the finance organization actually expects to collect. Prestige Worldwide has a tax rate of 25% for 2018.

1. Using the information given above, construct the Income Statement and Balance Sheet for the Fiscal Year ended December 31, 2018.
2. What is the difference between gross revenue and the net revenue? Please explain your understanding of this difference, what it is comprised of, and why it is important.
3. What is the Operating Margin ratio (both definition and in words)? If the benchmark for operating margin ratio is 20.06% for the entertainment industry, how does Prestige World wide’s compare to this benchmark? Why is managing the Operating Margin so important for all financial Organizations? What are the implications to Prestige Worldwide of this ratio?
4. What is the Net Profit Margin Ratio (both definition and in words)? If the benchmark for net profit margin is 9.86% for the industry, how does PW's compare to this benchmark? What are the implications to PW's of this ratio?
5. What is the difference between operating margin and net income and why is it important to manage both?
6. What is the estimated Cash Flow using only the income statement or estimate the amount of cash generated during FY 2018 using the income statement.    (Cash Flow = Net Income+Noncash expenses).   The only Non-cash expense listed is depreciation expense.   Why is this calculation Important to Manage?
7. What is the Times Interest Earned Ratio (both definition and in words)? What does it measure and why is it important? What is PW’s Times Interest Earned ratio?

Answer 1

Income Statement.

Purticulers	Amount($)
Gross Service Revenue	$115,981,250.00
Discounts on Sales	-$3,575,000.00
Income from Investment	$94,500.00
Contribution Received	$1,000,000.00
Total	$113,500,750.00
Less:Expenses
Bad Debt Expense	$2,655,000.00
Salaries	$55,825,000.00
Benefits	$14,178,292.00
Administrative	$4,342,500.00
Insurance	$325,000.00
Depreciation	$3,200,000.00
Maintenance	$435,500.00
Purchased Services	$6,146,500.00
Rent	$2,240,000.00
Supplies	$9,169,813.00
Utilities-Electricity	$356,000.00
Earning Before interest and tax	14,627,145.00
Less Interest	$164,575.00
Earning before tax	14,462,570.00
Less:Tax@25%	$3,615,642.50
Income After Tax Or Net Revenue	$10,846,927.50

Note:It is assume that contribution received is revenue receipt and liable to tax@25%

Balance Sheet

Liabilities	Amount($)
Account Payable	$2,375,000.00
Accrued Expenses	$9,125,000.00
Notes Payable	$16,515,000.00
Long-Term Debt	$26,500,000.00
Retained Earnings	$13,040,000.00
Total	$67,555,000.00
Asset	Amount($)
Cash and Cash Equivalents	$9,545,000.00
Short-term Investments	$2,750,000.00
Net Accounts Receivables	$7,125,000.00
Inventory - Supplies	$1,135,000.00
Property and Equipment	$90,500,000.00
Accumulated Depreciation	-$43,500,000.00
Total	$67,555,000.00

Difference between Gross revenue and Net Revenue.

Gross Revenue is revenue earned by Company from its main activities or core activities before any deductions of administration and other expenses.it shows business ability to sales.

Net Revenue is the revenue available to Company after deduction of all expenses.it helps to business to understand where it can minimize expenses.

Operating margin Ratio.

Operation margin ratio indicate Organization ability to earn from its core operation it is contribution earned by company towards interest,tax and fixed cost.

Operating Margin Ratio=EBIT/Total Revenue

=$146,27,145 / $1159,81,250

=12.61%

Benchmark Operating Margin Ratio for industry is 20.06% whereas for prestige it is 12.61% which is very low as compare to industry.

Net Profit margin ratio.

Net profit margin is the percentage of profit generated from revenue after accounting for all expenses, costs, and cash flow items.

=NET PROFIT/REVENUE

=$10846927.50/$115981250*100

=9%

benchmark for net profit margin is 9.86% for the industry whereas for prestige is is 9%, prestige can achive the benchmark by reducing expenses.

What is the difference between operating margin and net income and why is it important to manage both?

Please refer above operating margin and net margin ratio.